Recent developments suggest that “co-CEO” arrangements, and other structures designed to facilitate shared senior executive authority, are attracting new interest in health care, and other industry sectors. The concept is not novel—shared executive structures have long been utilized in industries such as professional services, investment banking and higher education.
Co-CEO arrangements are increasingly being considered in a variety of different contexts. One is to facilitate succession of a long-standing chief executive officer, particularly when there are two equally qualified candidates for the CEO position. Another is to address difficult leadership decisions arising from a business combination, particularly when it is considered a “merger of equals,” the parties are of similar economic value, and the parties’ CEOs are of similar age and have similar qualifications. A related context is in the merger situation, when one of the two co-CEOs is more senior in tenure and is transitioning toward retirement in the near term. Another, perhaps more challenging situation is where a co-CEO is tapped to help supplement the skills and experience of the existing CEO during a period of financial or operational challenge for the company.
Co-CEO arrangements are now emerging in the consolidating health care sector, where large systems are combining in order to better respond to an evolving regulatory, reimbursement, patient care and financing environment. For example, a recently announced Illinois combination of a religious-sponsored health system and a secular health system features a co-CEO arrangement, in which the secular system CEO will, over a two-year period, transition to retirement with the religious-sponsored system CEO assuming full CEO duties at that point.
There are several other recent notable public examples of this type of arrangement. In the technology sector, long-time Oracle CEO Larry Ellison stepped down in favor of his deputies Mark Hurd and Safrra Catz, who had been serving as Oracle’s co-presidents since 2010.
Despite their current rise in popularity, co-CEO arrangements remain out of the mainstream and certainly present unique legal, tax, human resources, compensation, governance and interpersonal challenges in their development and implementation. Substantial effort is often necessary to position these arrangements for lasting success. There is no well-established pathway for structuring them; no “best practice” for their development; no accepted “right way” by which they are approached. They are typically intensely personal in nature, grounded in the degree of trust the co-executives have in each other, and in the confidence of board leadership that the arrangement is in the best interests of the organization.
Ultimately, the structuring and documentation of a co-CEO arrangement depends upon the appetite of the involved parties—both the putative co-CEOs and governing board leadership—for detail. By “detail,” we refer to a written resolution of the myriad unique contractual and interpersonal issues arising from a co-CEO arrangement. In that regard, the analogy is sometimes (perhaps unfairly) made to a betrothed couple’s decision to consider a prenuptial agreement. The suggestion that a detailed agreement is necessary may upset the balance of near-term trust between the parties, yet the presence of a detailed agreement may provide an element of long-term protection, particularly from the board’s perspective.
A decision as to which approach works best under the circumstances will depend in large part on an appreciation by the parties of the legal, contracting, tax, compensation and oversight issues presented by such an arrangement. These include, but are not limited to the following:
1. Position Duties.
The parties must have a clear understanding of the respective duties of the co-CEOs. This could include delineating areas of individual responsibility (e.g., the “I’m responsible for this and you’re responsible for that” delineation). The arrangement could also describe areas of shared responsibility (e.g., “these are the areas where we jointly make the call”). It could also be expected to address the length of time the co-CEOs will serve (e.g., short term or permanent) and, where relevant, the transition timing of one of the CEOs.
For example, the new Oracle co-CEOs have divided their duties along specific service lines. According to the company’s SEC filings, all manufacturing, finance and legal functions will continue to report to Safra Catz as CEO. All sales, service and vertical industry global business units will continue to report to Mark Hurd as CEO. (Both Catz and Hurd had previously been a president of Oracle). All software and hardware engineering functions will continue to report to Larry Ellison as executive chairman of the board and chief technology officer.
Depending on the desired level of detail, the understanding of the co-CEOs can extend across all of the traditionally accepted roles of the chief executive officer—for example, responsibility for operating the enterprise; direction of strategic planning; risk identification/evaluation /management; annual operating plans and budgets; selection of senior management; establishing an effective organizational structure; and financial reporting and disclosures.
Where appropriate, the arrangement should also address the “tie breaking process,” e.g., whether there is some formal or informal process by which the co-CEOs can resolve disputes in connection with areas of shared responsibility (or whether one co-CEO is empowered to make the final decision). There is also value in confirming the obligation of each co-CEO to share with the other any information or analysis known to one of them that is relevant to the decision making and oversight obligations of the executive office.
Sometimes, this understanding is reflected in a basic “handshake agreement” between the two CEOs. In other situations, it is memorialized in some detail in new employment agreements for the parties. It might also be contained in any applicable definitive merger agreement, where applicable.
2. Reporting Relationships.
There is also value in reaching an agreement between the co-CEOs with respect to reporting relationships—both from the co-CEOs to the board, and from the members of the senior leadership team to the co-CEOs. Should the co-CEOs always jointly report to the board, or do they divide reporting relationships based on an articulation of duties? Should guidelines be adopted on whether, and if so how, one co-CEO can independently initiate board level communication? What steps can be taken to avoid a “This month, let’s just let the board hear from me” approach?
Similar issues arise in the context of management team reporting. There may be benefit to a discussion, if not a written articulation, of the upstream reporting obligations of members of the senior management team. Is the expectation that all senior executives report to both co-CEOs? Do senior executives report to the office of co-CEO based upon the specific allocation of authority between the co-CEOs? Who is responsible for the evaluation and compensation recommendations applicable to the members of senior management?
3. Executive Compensation.
Determination of appropriate compensation arrangements also will be key to the successful implementation of a co-CEO arrangement. This determination should be conducted early in the process to assure reasonableness, and to address issues of expectation management by the proposed co-CEOs. There should be no assumption that current base levels of compensation must increase simply because of the responsibilities with respect to a much larger enterprise. The compensation arrangement may need to include incentive compensation with targets based in part on how well the co-CEOs will work collaboratively and in good faith, without discord.
A related issue is whether the retirement benefits packages of either of the co-CEOs may need to be revised to accommodate the new relationship and related transition timing. In addition, any transition-based consulting agreement for a former co-CEO should be carefully drafted to assure reasonable and necessary services are being provided for an appropriate duration, and for a reasonable level of compensation.
Pursuing a formal approach to compensation decisions (e.g., through the board’s executive compensation committee or similar body) makes sense even if the overall co-CEO arrangement is more informal in nature. For tax-exempt organizations, the new arrangements should be structured to satisfy the rebuttable presumption of reasonableness. That notwithstanding, identifying comparability data will be challenging due to the novel nature of the co-CEO concept.
More complex issues regarding negotiation, timing, approval and implementation of co-CEO compensation arrangements arise when the concept is being implemented as part of a merger.
The resolution of several of these operational, reporting and compensation issues may change if one of the co-CEOs is already designated to be the sole CEO after a specified co-CEO period. The presence of such an agreement would, or could, change the answer to many of the questions, particularly on breaking deadlocks, reporting to the board, and the types of responsibilities each co-CEO undertakes.
4. Board Oversight.
Critical to the success of a co-CEO arrangement—whether based on formal or informal understandings—is effective board oversight. The board chair (or co-chairs, as the case may be in a merger) should be tasked with the responsibility for establishing a process for board oversight of the arrangement. This might include, among other elements, a process by which the co-CEOs periodically communicate with the chair(s), guidelines by which the board can evaluate the ongoing success of the co-CEO arrangement, dealing with the death, disability or termination of one of the co-CEOs, and a process by which disputes between the co-CEOs can be resolved. It may address the need to “unwind” the co-CEO arrangement in circumstances of deadlock. Another board-level decision may relate to how the co-CEO relationship affects the protocol for who serves as principal public corporate spokesperson.
Conclusion
While still novel, co-CEO arrangements are emerging in health care, and in other industry sectors. They are being considered as a means of addressing several types of legitimate senior executive and corporate strategy needs. Some are established through informal agreements, and others are established through detailed written contracts. In any event, the establishment of a co-CEO arrangement implicates a number of unique legal, tax, human resources, compensation, governance and interpersonal considerations. Yet, there is no established template or “best practice” for their creation. For those reasons, the development of co-CEO arrangements will benefit from the close input of the general counsel.
Learn more about Bloomberg Law or Log In to keep reading:
Learn About Bloomberg Law
AI-powered legal analytics, workflow tools and premium legal & business news.
Already a subscriber?
Log in to keep reading or access research tools.