Corporate governance in the United Kingdom and the United States shares many similarities, to such an extent that people often refer to the "Anglo-US model." When it comes to separating the roles of the chairman and the chief executive officer, however, this model accommodates a stark difference.

In the United Kingdom, about 95 percent of all FTSE 350 companies adhere to the principle that different people should hold each of these roles. In the United States, by contrast, nearly 80 percent of S&P 500 companies combine them—a proportion that has barely changed in the past 15 years. Why are the two countries held up as having the best corporate-governance systems polar opposites in their top-leadership structures?

The view in the United Kingdom—and other countries that embrace the idea of separation (exhibit)—is that it constitutes an indispensable component of board independence because the tasks of the chairman and the CEO are different and potentially conflicting. The CEO runs the company; the chairman runs the board, one of whose functions is to monitor the CEO properly. If the chairman and the CEO are one and the same, it becomes more difficult for the board to criticize the CEO or to express independent opinions. A separate chairman, the argument goes, is more inclined to probe and to encourage debate at board meetings—not least because the chairman has a fresh perspective when examining issues raised by management. Under a consolidated model, management might be more tempted, and more able, to withhold information (which generally means bad news) from the board, thereby reducing its ability to assess the company’s performance. And nobody is monitoring the chief executive, except the chief executive.

Separating the roles is therefore essentially a check on the CEO’s power, but it also tempers the risk that the CEO will focus on shorter-term goals, particularly when evaluations and rewards are geared to achieving them. A separate, independent chairman can help maintain a longer-term perspective. Independence apart, many argue that one person can’t carry out two such increasingly difficult jobs. Separating them frees the CEO to focus on running the business and the chairman to discharge the board’s expanding responsibilities.

What of the counterarguments? One of the most important is that separating the two roles robs CEOs of the authority needed to do the job properly. It can also create confusion about who is accountable for the company’s performance. A separate chairman might even attempt to usurp the CEO’s functions. Some also argue that fusing the two positions facilitates decision making, particularly in emergencies, and helps a board stay better informed about company matters.

Few would deny that the independence of boards is crucial. But opponents of separation argue that it doesn’t necessarily deliver the goods. They believe that the supposed benefits, such as a more detached and objective board, are short-lived: the longer a chairman stays in the job, the less independent he or she becomes.

To allay concerns that combining the two roles compromises a board’s independence, opponents of separation propose the idea of a "lead director": a nonexecutive who acts as a link between the chairman-CEO and the outside directors, consults with the chairman-CEO on the agenda of board meetings, and performs other independence-enhancing functions. Some 30 percent of the largest US companies have taken this approach. Its defenders claim that, combined with other measures—such as requiring boards to have a majority of independent directors and to hold some sessions without the presence of management—it obviates the need for a separate chairman.

Weighing the arguments

On balance, we find the arguments for separating these roles to be more persuasive because separation gives boards a structural basis for acting independently. Reducing the power of the CEO in the process may be no bad thing: compared with other leading Western economies, the United States concentrates corporate authority in a single person to an unusual extent.¹ Furthermore, rather than sow confusion about accountability, the separation of roles makes it clear that the board’s principal function is to govern—that is, to oversee the company’s management and hence to protect the shareholders’ interests—while the CEO’s is to manage the company well.

The appointment of a lead director may be a useful transitional measure for companies preparing to separate the two roles but is ultimately unsatisfactory—the CEO is still the boss. To be effective, the lead director must have as much authority as a separate chairman, thus reducing the need for the CEO to combine the two jobs.

Separating them, of course, is no panacea for making boards effective. A structurally independent board won’t necessarily exercise that independence: some companies with a separate chairman and CEO have failed miserably to carry out their oversight functions. What’s more, a chairman without a commitment to the job isn’t likely to put independence to good use. The separation of roles must therefore be complemented by, for example, a dynamic boardroom culture (which allows the chairman and other board members to challenge the CEO without fear of giving offense) and good selection processes for hiring the chairman. The ideal candidate must have enough time to devote to the job, a good knowledge of the industry, and a willingness to play a behind-the-scenes role. The best candidate is often an independent director who has served on the board for several years. It shouldn’t be the current CEO or another executive, who might be less willing to take a back seat and, naturally, would be less likely to conduct an objective assessment of existing policies and strategies.

The arguments in favor of separation clearly hold sway in the United Kingdom. Why do they seem less compelling to US companies?

A different career path

The ‘comply or explain’ approach proved to be a rallying point for investors in the United Kingdom

At the beginning of the 1990s, before corporate governance became such a mainstream concern, some 50 percent of the companies in the Times of London’s top 1,000 UK companies had already divided the two positions. What tipped the balance was the 1992 Cadbury Code of Best Practices (see "Why codes of governance work," to be published on mckinseyquarterly.com in mid-March), prompted by scandals at companies such as Polly Peck and Coloroll.² The Cadbury Committee’s report advocated separating the roles of chairman and CEO and required companies that didn’t follow this recommendation to explain their decision—the "comply or explain" approach. It proved to be a rallying point for shareholders. After the report was issued, UK institutional investors, led by the National Association of Pension Funds and the Association of British Insurers, began to protest each time a listed company awarded both posts to the same person. The press also played a supportive role by echoing the investors’ demands. The shift was rapid. By 1994, only 25 percent of the top 1,000 UK companies still combined the two roles.

The United States has no corporate-governance code that both explicitly recommends their separation and requires a company to justify its choice of leadership model. Perhaps as a result, US shareholders have been largely quiescent when US companies decide to retain a combined model. In particular, institutional investors that also do other business with companies—namely, investment banks—may be reluctant to jeopardize these relationships by engaging in shareholder activism. Another possible explanation for the relative lack of pressure on US businesses might be that their productivity and global competitiveness give investors little reason to rock the boat.

In the absence of a code of practice or a similar forcing mechanism, it’s unclear whether the idea of splitting the roles will ever really catch on in the United States. Over the past couple of years, a string of prominent US companies, such as Charles Schwab and E*Trade Financial, have switched to a separated model, stating that it would improve corporate governance. If this new arrangement proves successful, it could help build momentum for change. The recent decision of the New York Stock Exchange to separate the roles could prove influential as well. But US business culture will also need to change if the practice is to become widespread.

In the United Kingdom, the career path from CEO to chairman is a recognized and respectable one. The position of chairman carries great prestige, even though the pay is often only 10 to 20 percent of a CEO’s. This relatively modest compensation is often offset by the opportunities UK chairmen have to pursue diverse roles—for example, serving on government commissions or on the boards of charities as well as pursuing innovative business ventures or other personal interests—since chairmen typically serve only two or three days a week. In addition, chairmen not uncommonly serve for ten years and thus have more job security than CEOs, many of whom view a chairmanship as the pinnacle of a successful business career. This culture partly explains why so many UK companies split the roles even before the advent of the Cadbury Code.

A chairmanship holds far less prestige in the United States, perhaps because of a higher correlation between prestige and remuneration. Moreover, in the United States most highfliers expect to work flat out until they retire. A less demanding, relatively poorly paid part-time chairmanship might not be appealing for a highly successful person who is a decade or so away from formal retirement. It is more common in the United States for top executives to undertake public-service commitments, either during their business careers or when they retire.³

To encourage the separation of roles, the job of chairman could do with a little marketing. At a time when trust in corporate America is so low, helping to rebuild that trust would be a valuable public service indeed. Who better than the chairman of the board to undertake it?