By the end of this year, Pfizer will be unique among traditional large U.S. pharmaceutical companies: it will be the only one where the CEO does not also serve as chairman of the board. However, this situation is about to change. Pfizer recently announced that Albert Bourla will succeed Ian Read as chairman on January 1 next year, following the same path he took when he became CEO a year ago. At that point, Pfizer will also return to industry norms.

Among U.S. biopharmaceutical companies with a market value exceeding $20 billion, apart from Pfizer, only three other relatively smaller biotechnology companies separate the roles of CEO and chairman. This phenomenon highlights the high degree of consistency in governance structures among large U.S. pharmaceutical companies.

Large U.S. pharmaceutical companies commonly combine the roles of CEO and chairman

The following are examples of large U.S. biopharmaceutical companies where the CEO and chairman roles are held by the same person:

  • AbbVie: Richard Gonzalez
  • Allergan: Brenton Saunders
  • Amgen: Robert Bradway
  • Bristol-Myers Squibb: Giovanni Caforio
  • Celgene: Mark Alles
  • Eli Lilly: David Ricks
  • Gilead: Daniel O'Day
  • Johnson & Johnson: Alex Gorsky
  • Merck: Kenneth Frazier
  • Vertex Pharmaceuticals: Jeffrey Leiden

In contrast, peer companies in Europe and Asia generally have CEOs reporting to independent board chairmen. This difference stems partly from legal requirements, such as in Germany, and partly from the evolution of corporate governance practices.

Europe's tradition of independent chairmen

In the UK, for example, the trend toward independent chairmen began about twenty years ago following the collapse of Maxwell Communications. Subsequently, the famous Cadbury Report recommended that the role of board chairman "should in principle be separate from that of chief executive." This recommendation profoundly influenced UK corporate governance practices.

However, the U.S. pharmaceutical industry has shown strong resistance to pressure from activist investors to separate the roles. Federal regulators at least require companies that combine the CEO and chairman positions to explain the reasons for their choice.

"People who become CEOs usually don't want to report to anyone, so it's especially important to have someone overseeing the CEO," said Nell Minow, a corporate governance expert and vice chairman of ValueEdge Advisors, an institutional investor advisory group.

The biopharmaceutical industry's preference for combining the two roles is so strong that when Gilead Sciences recruited Daniel O'Day from Roche earlier this year, it directly granted him the dual titles of CEO and chairman, whereas previously the company had John Martin as chairman and John Milligan as CEO.

Companies that separate the CEO and chairman roles

The following are some large biopharmaceutical companies that separate the CEO and chairman roles:

  • Alexion Pharmaceuticals: CEO Ludwig Hantson, Chairman David Brennan
  • AstraZeneca: CEO Pascal Soriot, Chairman Leif Johansson
  • Bayer: CEO Werner Baumann, Chairman Werner Wenning
  • Biogen: CEO Michel Vounatsos, Chairman Stelios Papadopoulos
  • GlaxoSmithKline: CEO Emma Walmsley, Chairman Jonathan Symonds
  • Novartis: CEO Vasant Narasimhan, Chairman Joerg Reinhardt
  • Novo Nordisk: CEO Lars Fruergaard Jørgensen, Chairman Helge Lund
  • Pfizer: CEO Albert Bourla, Chairman Ian Read* (*until December 31)
  • Regeneron: CEO Leonard Schleifer, Chairman P. Roy Vagelos
  • Roche: CEO Severin Schwan, Chairman Christoph Franz
  • Sanofi: CEO Paul Hudson, Chairman Serge Weinberg
  • Takeda: CEO Christophe Weber, Chairman Masahiro Sakane

U.S. corporate governance trends

According to Julie Daum, head of the North American board practice at consulting firm Spencer Stuart, 53% of companies in the S&P 500 currently separate the chairman and CEO roles, compared with only 37% a decade ago. This upward trend coincides with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, which requires companies to disclose in their annual proxy statements the reasons for choosing to combine or separate the two roles.

For example, earlier this year, Allergan management successfully defeated a shareholder proposal to separate the CEO and chairman roles held simultaneously by Brenton Saunders, following a series of strategic missteps. In response, the board proposed a "refreshment" plan, bringing in Bob Hugin, former CEO and chairman of Celgene, and appointing a lead independent director. When Saunders steps down as CEO, the chairman and CEO roles will be separated.

Arguments for and against separation

The main argument in favor of separation is strengthened oversight. An independent chairman can serve as a "natural leader" when shareholder and management interests diverge. Eric Orts, professor of business ethics at the Wharton School of the University of Pennsylvania, notes that in the extreme case where the board decides to fire the CEO, an independent chairman can temporarily take over the company and help plan succession.

However, Minow of ValueEdge says that board independence depends on whether the CEO can dominate the board's agenda and the process of providing information to directors. "A sign of a bad board is when they receive materials less than a week before meetings, and the content is determined by the CEO."

Orts also points out that without structures that allow employees to check management, an independent chairman cannot guarantee oversight throughout the company. "Simply having an independent chairman to deal with emergencies doesn't really prevent the next crisis."

Nevertheless, in the biopharmaceutical industry, there are also reasons to support the CEO also serving as chairman. Michelle Lowry, a professor at Drexel University and academic director of the Governance Institute at the business school, believes that the amount of information required to manage innovative companies that heavily depend on intellectual property may exceed what an independent chairman can digest, which may be why pharmaceutical companies tend to combine the roles.

"If a company's core value contains a lot of specific information, an independent chairman may find it difficult to make these decisions," she says. "For companies with high information asymmetry... there may be economic reasons to combine the chairman and CEO roles."

Currently, from Vertex Pharmaceuticals to other large pharmaceutical companies, there seems to be a tendency toward this position. The shift toward separating the roles is at best gradual, as seen in the case of Allergan during its leadership transition.

However, shareholder dissent could be a game-changer. Scandals and lawsuits are often triggers for CEO dismissals and may also prompt companies to undertake governance reforms, including separating the roles. Lowry specifically mentions that "derivative lawsuits"—where shareholders sue management or the board on behalf of the company for misconduct—can effectively drive change.

Without such events, activist investors may need to repeatedly propose separation resolutions at annual shareholder meetings for years before gaining majority shareholder support or prompting management and directors to concede.

"These things move slowly," Lowry says. "That doesn't mean change shouldn't happen, but the reality is that achieving goals requires a lot of effort and money."