Co-CEO Structure: Some benefits, Some drawbacks

April 8, 201510:00 am2331 views
Co-CEO Structure: Some benefits, Some drawbacks
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General Counsels may find they are working at a company with co-CEOs. And there is good reason to believe the management set-up will work, especially if it is properly implemented by the institution, despite being a rare structure.

Joseph Porac, a professor at New York University’s Stern School of Business, said in an interview about co-CEOs that “It’s not a very common structure. It can work. When it is effective, the two CEOs may have complementary skills, there is a good relationship between them, and it can add value to the company.There should be a culture of cooperation for the system to work effectively.”

Often, when the co-CEO system is used, there are good reasons for it to be employed. One time it may make sense is in a regulated industry, such as with utilities or financial services, where one CEO may have extensive legal or regulatory background. That CEO could handle regulatory matters.

It may also make sense if a company is coming through a scandal or has been acquired by another firm, and the co-CEO approach will be used for a relatively short period of time, such as a year. It sometimes also is used in family-owned firms, when two relatives, such as a parent and a son/daughter are co-CEOs in companies.

It helps to prepare the younger relative to take over the company. And it may be used in order to keep co-founders equal as a company evolves. A co-CEO system may work better for top management, such as general counsel, if they report to just one of the CEOs, though they could also report to both. In general, like most things, it works when the circumstances are right.

One example in the financial sector of co-CEOs was seen at Citigroup, where Sanford Weill and John Reed ran the giant company together, and Reed left after two years. One of the classic principles of management is the theory of unity of command, which calls for everyone to report to only one boss, a key reason why organisations are usually organised hierarchically.

However, there are potential negatives when co-CEOs are in charge. According to European CEO, “Egos inevitably become inflated when moved into the echelons of upper management – and even when two seasoned and mature executives think they’ve evenly distributed the responsibilities of their shared job, it’s exceedingly difficult for companies to adapt to a divided command structure.”
There is another problem related to reporting because board members are not sure to whom they should be reporting to. Fundamentally, two heads never work over the long-term—just as there are no ‘mergers of equals,’ because in the end the products, services, culture and marketing approach of one company … in the end prevail,” Helmuth Uder, head of board and executive remuneration consulting at Towers Watson, told The Wall Street Journal.
But when it works, there can be lucrative benefits. One instance is at the Chipotle restaurant chain. “By the end of Chipotle’s first year under dual-leadership, earnings had jumped by an incredible 67 percent – and things haven’t slowed down since,” according to European CEO.
To make it work, European CEO recommends, “Communication is key, and clear divisions must be made regarding each person’s workload and responsibilities. Even then, the system is difficult to maintain. After all, shared responsibilities mean shared accountability, therefore, the provision of multiple CEOs can make it difficult for board members to know exactly who should be held liable for mistakes.”
With strategic outcomes in mind, Stephen Ferris, director of the Financial Research Institute at the University of Missouri, said that between 1998 and 2008, 111 publicly traded companies in the US had co-CEOs. These included such well-known firms as Bed, Bath & Beyond and American Eagle Outfitters. Other companies, too, may opt for the co-CEO model in the future, given its ability to protect investor and shareholder interest in the log run, growing value for the company.
The original article first appeared on Inside Counsel
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