What is a CEO (Chief Executive Officer)?
A CEO, which stands for Chief Executive Officer, is the highest-ranking individual in a company or organization. The CEO is responsible for the overall success of a business entity or other organization and for making top-level managerial decisions. They may ask for input on major decisions, but they are the ultimate authority in making final decisions. There are other titles for CEOs, such as chief executive, president, and managing director.
The Chief Executive Officer reports directly to, and is accountable to, the Board of Directors for the performance of a company. The Board of Directors (BoD) is a group of individuals who are elected to represent the shareholders of the company. The CEO often sits on the board and, in some cases, she or he is the chairperson.
Roles and Responsibilities of the CEO
In addition to the overall success of an organization or company, the CEO is responsible for leading the development and execution of long-term strategies, with the goal of increasing shareholder value.
The roles and responsibilities of a CEO vary from one company to another, often depending on the organizational structure and/or size of the company. In smaller companies, the CEO takes on a more “hands-on role”, such as making lower-level business decisions (e.g., hiring of staff). In larger companies, he or she usually only deals with high-level corporate strategy and major company decisions. Other tasks are delegated to managers or departments.
There is no standardized list of the roles and responsibilities of a chief executive officer. The typical duties, responsibilities, and job description of a CEO include:
- Communicating, on behalf of the company, with shareholders, government entities, and the public
- Leading the development of the company’s short- and long-term strategy
- Creating and implementing the company or organization’s vision and mission
- Evaluating the work of other executive leaders within the company, including directors, vice presidents, and presidents
- Maintaining awareness of the competitive market landscape, expansion opportunities, industry developments, etc.
- Ensuring that the company maintains high social responsibility wherever it does business
- Assessing risks to the company and ensuring they are monitored and minimized
- Setting strategic goals and making sure they are measurable and describable
Basic Corporate Structure of a Company
To look after the interests of shareholders, many firms adopt a two-tier corporate hierarchy – the first tier being the Board of Directors and the second tier being the company’s upper management (COO, CEO, CFO).
Elected by shareholders are the Board of Directors – the ultimate governing authority of the company. The Board of Directors selects the Chairperson and CEO. With the recommendation of the CEO, the Board of Directors also elects the COO – Chief Operating Officer – and CFO – Chief Financial Officer.
The Difference Between a CEO and Chairperson of the Board
There should not be any confusion between the role of a CEO and that of a Chairperson of the Board. The CEO is the top operational decision-maker at a company, while the Chairperson of the Board is responsible for protecting the investors’ interests and for overseeing the company as a whole. The Board of Directors usually meets several times a year to set the company’s long-term goals, review financial results, evaluate the performance of executives and managers, and vote on strategic decisions proposed by the chief executive.
The Chairperson of the Board is technically superior to the Chief Executive Officer, as he or she cannot make major moves without the approval of the board. The chairperson could essentially become the ultimate boss of the company or organization. However, this is rare, as most board chairpersons are not so directly involved in day-to-day business operations, leaving the CEO with flexibility in running the company.
Reasons to Separate the CEO and Chairperson Positions
In some cases, the position of Chief Executive Officer and Chairperson of the Board are held by the same person. Most organizations and companies permit the Chief Executive Officer to become the chairperson, which can cause conflict of interest problems.
The two examples below show how a conflict of interest problem can arise if both positions are held by the same person:
- The Board of Directors votes on increasing executive pay. If the Chief Executive Officer is also the chairperson, a conflict of interest arises because he would be voting on her/his own compensation.
- The Board of Directors is responsible for evaluating the performance of executives such as the CEO. If the Chief Executive Officer also holds the position of Chairperson, she or he exercises the power to decide if her/his performance is satisfactory.
Therefore, good corporate governance usually prescribes a separation of duties between the Chief Executive Officer and the Chairperson of the Board. In the UK and other countries, it is forbidden by law for the CEO and Chairman of the Board to be the same person.
Thank you for reading CFI’s guide to CEO. CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification, developed to turn anyone into a world-class financial analyst.
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