Explainer: Understanding the role of lead director in US corporate governance

In the landscape of corporate governance, the role of ‘lead director’ has become a notable practice in the United States. In a recent webcast, a member raised the questions, what are lead directors, why are they are prevalent on US boards and is it a trend we should expect to see gain footing in New Zealand?  

In the US, it is common for the CEO to also hold the position of board chair. According to research published in the Harvard Law School Forum on Corporate Governance, 44 per cent of S&P 500 companies had a combined CEO and board chair role in 2023, up slightly from 42 per cent in 2022, but the trend over the past decade has been for the roles to increasingly be split. 

A dual CEO/chair role can concentrate significant power in one individual, potentially limiting the board's ability to effectively oversee, and challenge, the CEO’s decisions. To mitigate this concentration of power and enhance board independence, many US companies appoint a ‘lead director’ to provide an independent counterbalance to the CEO/chair, ensuring  the board’s oversight function is not compromised. 

For some organisations, lead directors are a requirement of listing rules. Lead directors are appointed from the independent non-executive directors on a board to act as a counterweight to the power of the chair/CEO. Some US boards nominate a lead director even when the CEO and chair roles are separate, where they usually play a role in supporting the chair.  

The primary responsibilities of the lead director include coordinating the activities of the independent directors, advising on board agendas, presiding over meetings of independent directors, and serving as a liaison between the independent directors and the CEO/chair – in essence many of the functions we expect of a chair. 

Retaining the independent chair system 

While the role of lead directors provides a valuable function in US corporate governance, New Zealand's existing practice of usually maintaining an independent chair separate from the CEO is a strong governance model that should be retained. Here are several reasons why this separation is beneficial: 

• • Clear separation of roles: Having an independent chair distinct from the CEO ensures a clear separation of responsibilities. This separation helps to prevent any conflict of interest that might arise from combining executive and oversight roles, thereby enhancing the board’s ability to provide unbiased oversight. 
  • Enhanced accountability: An independent chair can objectively evaluate the performance of the CEO. This accountability is crucial for maintaining high standards of governance and ensuring the company’s strategic objectives are being met. 
  • Balanced decision-making: An independent chair can facilitate more open and robust discussions among board members, ensuring diverse perspectives are considered and decisions are made in the best interest of the company and its stakeholders. 
  • Improved board dynamics: An independent chair can help manage board dynamics effectively, ensuring all directors are engaged and their contributions are valued. This leadership fosters a collaborative environment where directors can freely express their views and provide constructive challenges to management. 
  • International best practice: Many governance codes around the world, including the NZX Corporate Governance Code, recommend the separation of the chair and CEO roles. Retaining this structure aligns New Zealand companies with international best practices, enhancing their credibility and attractiveness to investors. 

Relevant resources from the IoD New Zealand

For further reading see the following sections of the Four Pillars of Governance Best Practice for New Zealand directors (members only):

• • 2.4.10 – CEO/chair separation 
  • 2.12 – Role of the chair