Splitting

Splitting refers to the separation of the leadership of the board and the leadership of the company. The Cadbury Report noted a need to maintain a balance of power and a division of responsibilities at the head of a firm and, subsequently recommended the separation between the role of the chairperson and the role of the CEO to avoid granting any one person a

Before

structuring and

negotiation:

• Eliminating executive power over the board and the process of establishing remuneration by:

•Splitting the role of the CEO from the role of the Chairperson.

•Reducing the tenure period and mandating shareholder approval of payment for the loss of office.

•Establishing an independent remuneration committee to decide executive remuneration.

Guidelines for

structuring and

negotiation:

•In three forms:

•Hard law such as prohibiting tenure periods longer than two years without shareholder approval as well as those introduced by the Remuneration Code which gives instruction to financial institutions on prohibiting certain practices which induce excessive risk taking.

•Soft law in the form of the principles contained in the UK Corporate Governance Code.

•Guidelines from institutional shareholder representatives such as the Association of British Insurers.

The final step

after structuring

and negotiation:

•Extensive disclosure requirements to facilitate shareholder votes and influence outrage cost.

• Mandating an advisory vote for shareholders to give owners greater power and influence over executive pay.

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considerable concentration of power40 and to enable each of them to concentrate on their own affairs: the CEO running the firm and the chairperson running the board and ensuring its effectiveness.41 Accordingly, this recommendation has been in the Corporate Governance Code since then, aiming to improve board independence through a clear separation and structuring of the leadership of the board from the leadership of the company. Therefore, this separation was seen to contribute to the board’s effectiveness and independence, while in the USA this separation was not widely supported and instead a majority non-executive board was established as the norm to achieve independence and effectiveness for the board. In contrast, public companies in the UK usually have a unitary board, which like their US counterparts, is composed of executive and non-executive directors, among them the chairperson, the chief executive officer, and the senior independent director with an appropriate combination of executive and non-executive directors, which means in practice that the numbers should be similar; otherwise, the presence of the larger group will dominate the board.

A particular emphasis has been given in the Corporate Governance Code to the independence of the non-executive directors.42 This recommendation has its origin in the Higgs Review, which recommended that half the board members, excluding the chairperson, should be independent non-executive directors.43 However, Sir David Walker criticised this and the criterion of independence on the grounds that independence can sometimes conflict with the financial experience that is required from the directors of banks and other financial institutions (e.g. former CEOs and non-executives who serve more than nine years), which might force them to increase the board size in order to maintain a balance.44

40

Financial Reporting Council and London Stock Exchange, “Cadbury Report (The financial aspects of corporate governance)” (1 December 1992) para 4.9, (Cadbury Report).

41 _{SW Holden, “Improving Board Effectiveness” (2010) 23(11) Company Secretary's Review 86, 87.}

42 _{Financial Reporting Council, The UK Corporate Governance Code, (September 2014) principle B.1.2, (UK}

Corporate Governance Code).

43 _{Department of Trade and Industry, “Review of the role and effectiveness of non-executive directors” (2003),}

(Higgs Review).

44 _{D Walker, “A review of corporate governance in UK banks and other financial industry entities: final}

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However, some scholars have argued against the separation on the grounds that the presence of two leaders can lead to conflict and “a dynamic enterprise needs just one leader”.45 In addition, the independence of a board is doubted, as it has been said that directors of public companies are chosen through “the old school tie” approach, which means that existing directors select new directors to make sure they are like-minded people; they are then routinely approved by shareholders.46 However, this kind of board “does not work and is even dangerous”.47

Others have asserted that even if non-executive directors were independent in their early days of taking a position on the board, this independence will not last.48 The lack of independence has also been attributed to conflicts of interest in the boardroom, as independent non-executive directors depend on senior executives to provide them with the information needed to make informed decisions. Senior executives might not provide them with the information or might not provide information of the quality required to make informed decisions, as senior executives want the board to be loyal to them and approve their proposals, particularly if they have private interests.49

It was also argued that the emphasis on independent directors would not result in optimum performance,50 which has been confirmed by the financial crisis of 2007-09, as many financial institutions chose independent directors who had little relevant management experience to meet the independence criterion.51