When Should a Board Separate the CEO and Chair Roles?

Pepsi’s recent challenges highlight one of the most difficult decisions a board can make: determining when unified leadership stops creating value and when greater independence becomes necessary.

PepsiCo is facing increasing pressure from investors. The company’s stock has fallen significantly from its 2023 peak, trades at its steepest discount to Coca-Cola in more than 25 years, and has become the subject of discussions about strategic restructuring, bottling operations, and leadership accountability. [wsj.com], [wsj.com], [wsj.com]

Most of the public debate has focused on management and strategy. Yet there is another question that deserves attention in boardrooms:

Should periods of prolonged shareholder dissatisfaction trigger a review of whether the CEO should continue serving as board chair?

That question is not unique to Pepsi. It is one of the most important governance decisions any board will face.

Importantly, this is not an argument that Pepsi’s governance structure caused its stock underperformance. There is no evidence supporting a causal relationship. Instead, Pepsi serves as a useful case study in understanding how boards should think about independence and oversight when investor confidence begins to weaken. [wsj.com], [wsj.com]

Stock Price is not a Governance Scorecard. It is a Confidence Scorecard.

Experienced directors know that boards should not govern based on daily stock movements. Markets can overreact, underestimate long-term strategy, and become overly focused on short-term results.

However, prolonged underperformance relative to peers sends a message that boards should not ignore.

Stock prices may not tell directors what to do, but they can tell directors what investors think. When a company consistently lags competitors, shareholders begin asking whether management has the right strategy, whether capital is being allocated effectively, and whether leadership is responding appropriately to changing market conditions. Those questions eventually reach the boardroom because investors expect directors to provide independent oversight when confidence in management’s direction begins to erode.

That is why governance discussions tend to emerge during periods of underperformance rather than periods of success. When performance is strong, shareholders assume the existing structure is working. When performance weakens, they begin scrutinizing not only management’s decisions but also the board’s oversight of those decisions.

The situation at PepsiCo illustrates this dynamic. As investors question the company’s strategic direction and compare its performance with Coca-Cola, governance naturally becomes part of the broader conversation. [wsj.com], [wsj.com], [wsj.com]

The Issue Is Not Power. It is Perspective.

Much of the CEO-chair debate focuses on power and authority. While those issues matter, they often miss the more important point.

The real issue is perspective.

Healthy governance depends on constructive tension between management and the board. Management develops strategy. Directors evaluate it. Management presents plans. Directors challenge assumptions. Management executes. Directors assess outcomes. That system works best when there is sufficient distance between those advocating for a strategy and those evaluating it.

When the CEO also serves as chair, that distance becomes harder to maintain. The same individual responsible for developing and defending strategy is also leading the board discussions where that strategy is reviewed. The same individual whose performance is being evaluated often influences meeting agendas, discussion priorities, and the flow of information presented to directors.

None of this means effective oversight becomes impossible. Many successful companies operate with combined CEO-chair roles. In fact, governance debates over combined leadership structures have surfaced repeatedly at companies such as JPMorgan Chase, Bank of America, Disney, and Starbucks when investors questioned performance, succession, or strategic direction.

The issue is not whether combined leadership can work. The issue is whether boards retain enough independence to challenge management when circumstances demand it.

The Most Important Question a Board Can Ask

Every board should periodically ask itself a simple but uncomfortable question:

Who tells the board that the strategy is no longer working?

Successful CEOs are expected to have conviction. They are expected to make decisions under uncertainty and maintain confidence during difficult periods. Those qualities are often essential to corporate success.

At the same time, strong conviction can make independent oversight even more important.

Directors create value when they are willing to challenge assumptions, explore alternatives, and reconsider long-standing beliefs before investors demand change. When shareholder dissatisfaction begins to grow, boards must determine whether management’s strategy remains the best path forward or whether new approaches deserve consideration.

That question is becoming increasingly relevant at PepsiCo. As investors discuss strategic alternatives ranging from bottling restructuring to broader leadership changes, the board faces the challenge of evaluating management’s assumptions while the CEO also serves as chair. The issue is not whether directors agree with management. The issue is whether directors have sufficient independence to objectively determine if a different course should be considered. [wsj.com], [wsj.com], [wsj.com]

This is where governance becomes critically important. The challenge is not that CEOs who also serve as chair somehow prevent oversight. The challenge is that directors must work harder to preserve the independence necessary to exercise objective judgment.

Why Boards Often Wait Too Long

If independent oversight becomes increasingly valuable during periods of underperformance, why do so many boards hesitate to separate the CEO and chair roles? The answer has less to do with governance mechanics than with human behavior.

Most directors understand this dilemma firsthand. They want to support management while also exercising independent oversight. They recognize that challenging a CEO is easier in theory than in practice, especially when the CEO has delivered years of successful performance and become closely associated with the company’s strategy. Governance failures often occur not because directors lack authority, but because they hesitate to exercise it until circumstances force the issue.

Most directors are accomplished executives themselves. They understand the challenges of leadership and generally prefer collaboration over confrontation. They work closely with CEOs, build trust over time, and often share responsibility for major strategic decisions.

As a result, separating the CEO and chair roles rarely feels like a simple governance adjustment. It feels like a judgment.

Directors know the decision can be interpreted as a signal that the board wants greater accountability, more oversight, or a different perspective. Even when those goals are appropriate, boards often hesitate because they do not want the move to be viewed as a loss of confidence in management.

Few boards fail because directors lack authority. Many struggle because directors are reluctant to use it.

Consequently, boards frequently postpone difficult governance discussions and hope operational improvements will resolve shareholder concerns before structural changes become necessary.

Ironically, that delay often makes the situation more complicated. The longer a CEO serves as chair, the more influence, credibility, and institutional authority that individual accumulates. Relationships deepen, governance practices become embedded, and directors become increasingly reluctant to alter a structure that may have existed for many years.

This creates a remarkable governance paradox: The moment an independent chair becomes most valuable is often the moment creating an independent chair becomes most difficult.

The Executive Chair Dilemma

Boards often attempt to solve this problem through a compromise.

Instead of appointing a truly independent chair, they create an Executive Chair position. On paper, the arrangement appears attractive because it separates the leadership roles while preserving continuity and institutional knowledge.

In practice, the results can be mixed. Executive chairs are frequently former CEOs who helped design the current strategy, maintain extensive relationships throughout the organization, and retain significant influence with directors. As a result, boards may believe they have separated management from oversight while many of the underlying governance dynamics remain intact.

In some cases, an Executive Chair can actually make independent oversight more complicated. Directors may believe they have separated management and governance while the company’s most influential leader remains deeply involved in both. Strategic discussions, succession planning, and board priorities can continue to be shaped by the same individual whose ideas and assumptions the board is attempting to assess independently.

The title changes. The influence often does not.

For that reason, boards should not assume that replacing a combined CEO-chair structure with an Executive Chair automatically creates meaningful independence. The crucial question remains whether oversight has actually become more objective, not whether organizational charts have been updated.

What Pepsi Teaches Boards

The lesson from PepsiCo is not that combining the CEO and chair roles is inherently flawed.

Nor is it that an independent chair automatically leads to better performance.

History suggests that governance debates rarely emerge during periods of success. They typically arise after strategic challenges, shareholder dissatisfaction, or prolonged underperformance lead investors to question whether existing structures still provide the oversight required. Pepsi simply provides a current and highly visible example. As investors question the company’s direction and discuss potential strategic changes, the board faces the same question confronting many directors across corporate America: does the current governance structure provide sufficient independence to evaluate management’s response to those concerns? [wsj.com], [wsj.com], [wsj.com], [wsj.com]

At the same time, boards should avoid a simplistic conclusion that an independent chair alone solves the problem. Weak directors can hide behind an independent-chair structure just as easily as strong directors can provide rigorous oversight under a combined CEO-chair model.

Ultimately, governance is about behavior more than organizational charts.

Structures matter. Director independence matters more.

The Hardest Governance Decision

Boards spend years evaluating strategy, capital allocation, risk, and succession. They spend enormous time deciding who should become CEO. They spend far less time deciding when that CEO should stop leading the board.

Yet one of the most consequential governance decisions is often the one boards postpone the longest: deciding who should lead the board itself. Pepsi’s challenge is not proving that a combined CEO-chair structure fails. Its challenge is forcing directors to confront a harder question. When investors lose confidence in a strategy, should the same individual continue both advocating for that strategy and leading the board responsible for evaluating it? [wsj.com], [wsj.com]

The answer may differ from company to company. But every board should decide how it would answer that question before performance forces the discussion. For directors, that may be one of the most uncomfortable conversations in governance. It may also be one of the most important.