Companies worldwide are wrestling with the question: are two heads better than one? Increasingly, the view of the investment community is that separate people should hold the roles of company chairman and chief executive. It is a view that has long been catching on among companies in the UK, where the vast majority of firms already separate these roles. In the US, by contrast, one individual still typically holds both top jobs.
But US firms are finally beginning to feel the pressure to separate the roles and appoint a genuinely independent chairman. And there is significant scope for reform: only 20 percent of large US companies currently separate the roles of chairman and chief executive.
Analysis from The Corporate Library, a US governance research firm, shows that in the majority of cases where the two top jobs are split, the chairman’s post is actually held by the former CEO. The Corporate Library found just 15 companies in the S&P 500 with a truly independent chairman.
Turning up the heat
US trade union pension funds have now taken the lead in calling for the widespread appointment of independent chairmen. Damon Silvers, associate general counsel at the AFL-CIO, the US trade union body, explains the prevailing sentiment: ‘We view it as an important part of the package of governance reforms we’d like to see. Until recently, management was not really answerable to anyone. The effort to separate the role of the chairman/CEO is undoubtedly part of a program to make boards both more powerful and more functional.’
Pension funds have filed shareholder resolutions at many US companies, calling for the CEO to give up the chairmanship. Silvers says the proposal is usually aimed at situations where there is obviously a dominant CEO or a passive board, as indicated by excessive pay, lack of board independence or company underperformance. It is a useful resolution ‘where the company is being used as a personal toy of the CEO,’ he notes.
UK pension funds and fund managers with significant exposure to US equities are also keen to see the wider use of independent chairmen. Colin Melvin, corporate governance manager at Hermes Investment Management, the £44 bn ($81 bn) fund manager, says, ‘It is generally recognized in the UK that the roles should be separated. In the US, that recognition isn’t there. US governance practice is not the best, and clearly some reforms need to be made.’
Daniel Summerfield, corporate governance adviser at the Universities Superannuation Scheme (USS), the £20 bn pension fund for the higher education sector in the UK, says appointing an independent chairman is the single most significant reform US companies could implement to restore investor confidence in the wake of 2002’s corporate scandals. ‘All other changes could be largely cosmetic,’ he adds.
USS presented a paper to the US institutional investor community last year, which argued strongly in favor of appointing an independent chairman. Combining the jobs impedes board effectiveness and presents clear conflicts of interest, the fund said.
Making headway
Undoubtedly, there has been progress in the US on separating the roles. The report of former SEC chairman Richard Breeden into the flawed governance at WorldCom recommended the company move forward with separated powers at its head.
The Conference Board, the business-led research group, published a high-level report on governance reforms in the wake of the Enron and WorldCom failures that calls on companies to find an appropriate balance between board and management functions. The committee responsible for the report includes such luminaries as Peter Peterson, the former US secretary of commerce; John Snow, US secretary of treasury and former chairman and CEO of CSX; Andrew Grove, chairman of Intel; Arthur Levitt, former chairman of the SEC; and Paul Volcker, former chairman of the Federal Reserve. Their report recommends ‘each corporation give careful consideration, based on its particular circumstances, to separating the offices of the chairman and CEO.’
The NYSE, mired in scandal over payment terms to Richard Grasso, the former joint chairman/CEO, tried to put its house in order by appointing an independent chairman. And, in response to a historic shareholder ‘no’ vote against Disney’s chairman and chief executive Michael Eisner at the company’s annual meeting in March, the entertainment group also decided to split the top jobs.
According to Ralph Ward, author of two books on US corporate boards, companies tend to separate the roles of chairman and chief executive only in response to a crisis. ‘There might be a temporary increase in the number of companies that split the position but I don’t think it will be permanent,’ he says. ‘It runs too much against the corporate DNA of the US.’
Holding out
Indeed, despite these moves at Disney and the NYSE, there is considerable resistance to the idea that the separation of roles should be formalized in the US; neither Sarbanes-Oxley nor the revised stock exchange listing rules went so far as to make separation mandatory.
‘The general view from corporate America is that CEOs don’t like this idea,’ explains Silvers. ‘They prefer unified power in the company. There are situations where the CEO sees the chairmanship as his or her birthright, so there is great resistance at policy level to make this a requirement. And any attempt to make it mandatory would provoke ferocious opposition from the business community.’
The closest post-Enron reforms have come to addressing independence in the boardroom is with the revised NYSE listing rules, which require companies to name a lead or presiding director who is clearly independent and who should act as ‘captain’ for the cadre of non-executive directors.
But will this reform give US boards the necessary independent mettle? While some experts feel the NYSE’s lead-director proposal is a positive first step, they also believe it could be designed to forestall a more aggressive push in the direction of a separate chairman and CEO.
Softly, softly
However, Ward believes the lead director will become an influential position. ‘It will be a necessity following recent corporate reforms,’ he explains. ‘Someone on the board who is independent will have to take over such processes as evaluating the CEO’s performance. How much power the lead director has vis-?-vis the chairman/CEO will be a matter of individual chemistry, but I do see the position growing in power.’
Peter Clapman, senior vice president and chief counsel at TIAA-Cref, the $300 bn fund manager for US teachers and researchers, argues for a more considered approach. In the UK, a series of reports over the course of a decade developed the idea of separated roles. ‘These reports gave an imprimatur to the idea of a separate chairman and CEO, which came to be accepted by the business and shareholder constituencies,’ Clapman says.
It would be wrong, he adds, for the US simply to transplant practices that have taken a decade to mature in the UK. Instead, the US should go through its own period of thoughtful reform. ‘To adopt the developments of a different market, without the evolutionary process that went with it, is artificial and unlikely to succeed,’ Clapman notes. ‘We’ve gone through a lot of soul-searching since the scandals. It is quite possible that as the lead director position evolves over time, it will take on most of the characteristics of a fully independent chairman role. We’re just starting with this.’
The US is not alone in taking a gradual approach to chairman independence. Research from Déminor, the European governance consultants, finds that over 80 percent of the largest 300 European companies have a separate chairman and chief executive – but this conceals some markedly different practice in individual countries. In France, for example, only 40 percent of the largest companies have a single person in the chairman/CEO role.
Philippe Lespinard, chief investment officer of BNP Paribas Asset Management, which manages Ä167 bn ($202 bn) in assets, says: ‘We express a strong interest in separating the roles, except where the board’s independence is not in question. In France, a lot of companies still have the combined position, but the codes of practice are leaning toward splitting the roles. Some firms say separating the roles is the wrong thing to do. We listen to them, but bear in mind whether it is bad for the company or merely bad for the managers themselves.’
Tailor-made
Commentators agree the goal is meaningful board independence, not the adoption of a one-size-fits-all structure. Summerfield argues that such a debate over form versus substance may develop in the UK as investors recognize that separating the roles of chairman and chief executive does not necessarily ensure board effectiveness. ‘It’s not just about structure; it’s about competence,’ he says.
Summerfield acknowledges a change in practice can take time. ‘It may be difficult for a chairman/CEO to accept that an ostensible reduction in his or her responsibility and authority is in the best interests of the company,’ he explains. Indeed, while the personification of power is still in vogue, and vision and leadership remain so important, the lack of an independent counterweight to management is likely to persist for a while longer.
US investors say two heads are better than one
Vanessa Theiss reports on the push to separate chairman and CEO roles in the US
While separating the roles of CEO and chairman remains a relatively novel concept in corporate America, it’s one that more and more US companies are investigating. Back in January, Oracle founder and CEO Larry Ellison led the way when he stepped down as chairman and appointed CFO Jeff Henley to the position. Ellison retains his CEO title. The move is an attempt to make better use of talent, says Michael Boskin, a company director who heads the board’s compensation committee. ‘It will offload a bit of time and effort from the CEO, including the formal management of the board,’ Boskin explained at a recent Institutional Shareholder Services (ISS) event.
Ellison’s move was unconventional – most corporate top dogs relinquish the title of CEO rather than chairman. However, Oracle’s board felt it imperative that Ellison remain as CEO because he plays a principal role in crafting the company’s business strategies.In March tech giant Dell also split the two functions. However, unlike Ellison, Michael Dell preferred to renounce his CEO title and remain as chairman. Kevin Rollins, current president and COO, will take Dell’s place as CEO in July. Dell’s shift in leadership is meant to raise Rollins’ profile both internally and externally. ‘[The market] has a favorable view of Kevin already because he had been doing most of the analyst presentations,’ notes Lynn Tyson, vice president of IR at the company. ‘Analysts thought it was the right move to make. It acknowledges Kevin’s contributions and it makes it less likely somebody will try to lure him away from the firm.’
Splitting the two functions made sense because Dell and Rollins had been co-managing the company for three years. Dell is widely viewed as the mastermind behind technology and Rollins as the cerebral strategist responsible for day-to-day operations, according to Tyson.
Different approach
Unlike Dell or Oracle, Walt Disney’s decision to split the two functions was involuntary. After much resistance from the Disney board, a strong vote of no confidence for the company’s CEO Michael Eisner resulted in the splitting of chairman and chief executive roles at the entertainment firm. Eisner remains CEO but Disney director George Mitchell replaced him as non-executive chairman.
In a statement, Disney’s board said its decision came about because it had listened to shareholders’ message about splitting the two roles. But it goes on: ‘That is not to say we view the vote as limited to governance issues alone. We are aware that some voted for an immediate change in management and the board.’
Mitchell’s appointment is viewed only as a partial win for shareholders, however, because he is widely viewed as Eisner’s ally. Mitchell also received a high withhold vote (24 percent) from shareholders at the meeting.
‘This is nothing short of a slap in the face for shareholders,’ says Abe Freedman, chief policy officer at proxy advisory firm Glass Lewis. ‘To elevate Mitchell after he had such a significant withhold vote demonstrates the board is still not focused on listening and responding to the concerns of its shareholders. Look at what happened with Steven Case at AOL – he stepped down as chair after a 22 percent withhold vote.’
Shareholder resolutions relating to the separation of CEO and chairman, director independence and independent chairmen are bound to be the subject of about 50 shareholder resolutions this proxy season, predicts Patrick McGurn, vice president of ISS. ‘And [the separation of CEO and chairman] may turn up in countless director elections this season as well; witness the Disney meeting just past,’ he adds.
