WHAT IS THE DIFFERENCE BETWEEN A CHAIRMAN AND CHIEF EXECUTIVE OFFICER?

The article attempted to discuss their specific characteristics concerning their position in the company and laid lights on the companies' basic management structure. The differences between the Chairman and the Chief Executive Officer has been tabulated below, and the reasons for their separation in roles and responsibilities are deliberated with adequate justification.
Estimated Reading Time: 10 minutes

Introduction

The corporate entities follow a unified management structure worldwide that have proved to be an effective one in the comprehensive management of the company affairs internally and externally. The countries’ legal instruments worldwide suggest the companies follow layered management with multiple governing authorities and working executive to implement a robust corporate governance mechanism. The Indian Companies Act of 2013 has laid down a two-tier corporate hierarchy to manage and control its business. The first layer is covered by the Board of directors, who are elected representatives of the shareholders. The second tier comprises the key managerial personals appointed by the Board of directors to maintain, supervise and regulate today’s management of the corporation. The general structure of company management adopted in Indian companies are:

  1. Shareholders; The real owners of the company who invest funds and play prime role in taking decisions through resolutions
  2. Board of directors; The elected representatives of the shareholders residing over the company affairs and is headed by a Chairman who acts as a representative of the Board holding a diplomatic relation with the other stakeholders
  3. The managing director or the manager or the chief executive officer; The leader of the management team, performing strategic plans and implementing the board decisions
  4. Other executives, the secretary, auditors, accountant, solicitor and departmental managers appointed by the company to assist the top management

As per section 203 of the Companies Act 2013, company management’s structure has been put forth, which every company shall follow. The whole time Key managerial personals are the backbone of the company management, and they comprise of:

  1. Managing director,
  2. Chief executive officer or manager,
  3. A whole-time director,
  4. Company secretary,
  5. Chief operating officer,
  6. Chief financial officer.

The primary task of this company management is policy-making and decision making. It is interested in implementing the Board of directors’ resolutions and managing the day-to-day affairs vested in the personnels’ hands. These members are governed through the rules and regulations mentioned under the company’s articles of association and managed by the land’s statutory provisions.

Who is a Chairman

The Chairman is considered as the leader of the corporation who heads the Board of directors. They are appointed and regulated by the articles of association; they are elected by the board members to be the Chairman. Their powers and duties are regulated within the scope of the powers conferred to the Board of directors. However, the Chairman presides over a company’s meeting is neither wholly a ministerial officer nor a judicial officer; his duties are diverse. He is not liable to be mulcted in damages.

The Chairman pointed through a formal resolution by the Board or through an informal appointment by the shareholders. The court also has the power to appoint an independent Chairman to preside over a company’s meeting. Such a chairman is particularly necessary for factions among the shareholders, and a peaceful meeting under the chairmanship of a person appointed by either section is improbable. The Chairman of a company is considered to be the official director of the Board, who governs the outside daily operations of the company; some of its primary duties as a chairman are listed below:

  • appoint and terminate the managers, the state executive officers, and other executives who work under the management team carrying out day-to-day managerial affairs.
  • set up agendas and objectives for board meeting aiming at the growth and development of the business goals
  • provide opinions and recommendations to the Board and the management team on matters concerning the business and trade of the corporation
  • review the company financial accounts and internal oversight procedure to ensure transparency and accuracy
  • monitor and supervise the managers and evaluate their performance
  • fix long-term and short-term company goals in annual, three-year plans, five-year plans and ten-year plans
  • coordinate with the audit committees and shareholder relationship committee, and other such committees to maintain good corporate governance.

WHO IS A CHIEF EXECUTIVE OFFICER

The Chief executive officer is considered the officer who manages the corporation’s internal governance; they are regarded as the management team’s head, comprising various other key management personnel. They are the ex-officio director of the Board. The companies act of 2013 provides a legal intent upon the chief executive officer as a whole-time critical managerial person who occupies the second layer of the corporate hierarchy. The Board of directors appoints them by passing a resolution in the general meeting and conferred with the duties and responsibilities as a top-level executive of a company who is responsible for implementing the resolutions and schemes, strategies and policies made by the Board of directors, and managing the overall operations and resources of the company effectively.
The law did not prescribe any standardized duties and rules for the chief executive officer; the duties and responsibilities are entrusted to the terms and conditions passed by the resolution in the board meeting at the time of appointment of the chief executive officer, which are as follows:

  • coordinate with the other Key managerial personnel to act in accordance with fulfilling the objectives of the company
  • ensure compliance with a legal obligation and the rules and regulations mentioned in the articles of the association while carrying out business for the corporation
  • make strategic plans for the short-term and long-term benefit of the corporation
  • analyze risk and implement necessary risk mitigation strategies
  • supervise and monitor the financial transactions, contraction obligations, other activities taking place within the corporation
  • represent the management team and other key personals in the phone meeting and submit the records to the board members

Difference between Chairman and Chief Executive Officer

S.NOTRAITCHIEF EXECUTIVE OFFICERCHAIRMAN
 1.OperationThe chief executive officer operates within the scope of articles of association generally integrated into a company’s day-to-day activities.The Chairman does not participate in the day-to-day activities but precedes the general board meetings to operate the outside dealings.
 2.PositionThe chief executive officer holds the top position in the managerial department; which is the second tier of the company management and control operating below the Board of DirectorsThe Chairman holds the top position within the Board of directors or Board of trustees, which form the first tier of the company management and control operating below the shareholders
 3.StandpointThe Chief executive officer is considered the officer who manages the corporation’s internal governance; they are regarded as the head of the management team comprising various other key management personnel; they lead from within a company’s operational structure.  The Chairman of a company is considered to be the official director of the Board, who governs the outside daily operations of the company; they lead from beyond the functions of a company, guiding high-level activities, decision-making and policy-making
 4.Hierarchy The chief executive officer is the top senior executive over management, below the shareholders and Board of directors. The Chairman is the head of the Board of directors, below the shareholders and above the Chief executive officer.
 5.DelegationThe Chief executive officer generally delegates his activities to senior executives and senior managers to serve as business unit committee heads. They focus on strategic issues, such as market participation, contractual obligations, competition, partnerships and execution of agreements.The Chairman delegates the board members’ works to fix long-term and short-term company goals, serve as a business unit to make decisions and policies and hold the advisory position.
 6.ReportingThe chief executive officer directly reports to the Board of Directors and shareholders.  The Chairman manages the company’s board members who report to the shareholders in general meeting.
 7.Limitation overpowerThe chief executive officer cannot make significant moves without the Board’s permission. They cannot act independently without the consent of the Board of Directors.The Chairman who heads the Board is technically superior within the Board itself. They can effectively act without any limitation over their powers
 8.AppointmentThe Board of Directors appoints the chief executive officer through passing a resolution in the board meeting.The Chairman is appointed and regulated by the articles of association; they are elected personally by the board members among themselves to be the Chairman
 9.TenureAs may be prescribed by the board resolution, which may not exceed 4 to 5 yearsAs may be prescribed by the board members, which may not exceed 1 to 2 years
 10.CharacteristicsShould have clear vision and direction Good leadership and management skills Motivate and innovate new strategies Foresight and critical thinkingTactful Knowledgeable Good judgement and understanding Good decision-making skills Impartial
 11.ControlThe Chief executive officer is the top decision-maker for the company and oversees daily operations and logistics. They have control of the senior management and other executive membersThe Chairman is the head of the corporation and controls all the executive and non-executive staff in the corporation.
 12.Core responsibilityThe Chief executive officer’s core responsibility is implementing the resolutions and schemes, strategies and policies made by the Board of directors and managing the overall operations and resources of the company effectivelyThe Chairman’s core responsibility is to maintain a diplomatic relationship with the shareholders and the management team and make policies and decisions concerning its external relation.

Reasons for Separation of the Positions

Various reasons have suggested that the Chairman and the Chief Executive Officer should have their roles and responsibilities separately; they must maintain a balance of power to ensure effective corporate governance. While certain corporations appointed the CEO’s as the Chairman, it is highly suggested that the Chairman and the Chief executive Officer ensure its independence and clear authority lines. Having an independent Chairman gives the company the ability and authority to speak on behalf of the Board and represent them in the management team. It will allow the Board to challenge the Chief Executive Officer’s actions and approach the duties in more comprehensive and strategic ways.

The Chairman of the Board acts as the primary connection between the Board and management headed by the Chief executive Officer; this separation of power enables the corporation to achieve corporate governance and sustainable development goals more efficiently. This separation of powers and roles would have a valuable place during crisis dealings as the control of external affairs, and internal affairs are maintained separately by the two various authorities. Overall, an independent board head provides the necessary balance with the management’s Chief executive officer position.

In this competitive business environment with numerous financial crises, the corporations were under massive pressure from investors and other stakeholders to facilitate the separation of roles and responsibilities of the Chairman and the Chief Executive Officers to achieve independent leadership on the Board. Some of the managerial affairs which demanded the separation of roles between the Chairman and the Chief Executive Officers are as follows:

CORPORATE GOVERNANCE

Corporate governance is considered the primary requirement for achieving a sustainable developmental goal in a corporation. One of the prominent roles of the managing authorities is to monitor and supervise the executives’ activities and check whether they run in conjunction with the rules and regulations of the company and for the welfare of the shareholders, with the Chairman heading the first tier of management dealing with the diplomatic relations between the outsiders and the administration; and the CEO in the management position responsible for driving those operations, having a combined role results in monitoring the inside management and facilitating effective corporate governance.

AUDIT COMMITTEE

Various high profile corporate values for business in the financial market due to mismanagement and misappropriation of the corporation funds and improper maintenance of audit and accounts within the corporations. These corporate failures demanded strong regulations to have a corporate oversight over the audit accounts and timely disclosure of the records to the audit committee with accuracy and transparency. These internal and external control had to be facilitated through separate bodies to sit in the audit committee and manage. At the same time, others can review and monitor the auditing process. However, because the audit committee is a subgroup of the Board of directors who reports to the Chair of the Board of directors, it would limit the audit committee’s effectiveness if the chief executive officer acts as a chairman.

The whistle-blowers who report the misappropriation and mismanagement within the corporations would be limited in exercising their actions when these employees are connected to the individuals who cost the fraud and other abuse directly to the committee without reprisal would be threatening. When the Board is led by management, employees may be insecure in reporting such activities, and the audit committee may be less likely to act on such reports. Thus, it requires the separation of roles between the CEO and the Chairman.

However, while discussing the reasons for the separation of their roles concerning the board leadership structure, the question of whether or not to separate the Chairman and chief executive officer roles remains a hot governance topic for public companies, boards, and shareholders.  A study conducted by the Harvard Law School Forum on Corporate Governance suggested that “policy-making and shareholder guidelines focusing primarily on the separation of the Chair and CEO roles may omit a key dimension of effective board leadership. The focus instead should be on the effectiveness of the prospective or incumbent Chair of the Board.” It states that mere role separation would be inadequate to ensure adequate board leadership. The effective functioning of both layers of management in a coordinated way is of primary importance.

CONCLUSION

There are differences between the Chairman and the Chief Executive Officers; these differences in their roles and responsibilities are necessary, which cannot be avoided. Either authority can be seen overlapping in their powers and duties, or the same person can hold the position. The main benefit of separating these two roles is that it distinctly separates the board and management roles, facilitating its practical functionalities. The separation also allows each person to devote the proper time to their position. Chief Executive Officers hs the top-level function of managing the entire company executive team. In contrast, the Board of directors is tasked with evaluating the Chief Executive Officers and senior executives and regulating them. The Chairman of the Board roles eliminates potential conflicts of interest with the outsiders; both their parts have significant importance.

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