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To Split or Not to Split – That is the Question Boards Should Be Asking

With proxy season on the horizon, a new SEC rule will be requiring companies to justify the structure of the board’s leadership. That could have some companies thinking about whether the roles of chairman and CEO should be separated – an issue that’s been hotly contested for years.

Proponents of taking an axe to the two positions contend that combining them puts too much power in the hands of one person and creates an inherent conflict of interest. Their preference is to seat an outside director as chairman to ensure the board stays truly independent from management. The CEO can then focus on running the business while the chairman is tasked with protecting the interests of shareholders, including evaluating management’s performance.

 

The argument from across the aisle is that the positions of chairman and CEO share closely intertwined missions, so they can be assigned to a single individual. This camp believes that splitting the two roles can be disruptive, particularly if there is poor chemistry between the two individuals. If the friction spreads, it can have a detrimental effect on the whole organization and, worst case, lead to stalemates that bring the company to a standstill.

Proponents of the combined chair/CEO role also argue that smaller companies or ones in a turnaround situation benefit when a single individual can wield enough control to effectively lead and drive the organization. Also, in many instances the chairman/CEO is the founder of the company and/or one of its largest shareholders, which can complicate separating the positions.

Combining the roles of chairman and CEO remains the norm for U.S. companies. Just this week, for example, the board of General Motors named chairman and interim CEO Edward Whitacre Jr. as permanent CEO. But the trend toward splitting the two titles is picking up steam as the U.S. catches up with its counterparts in Europe, Canada and elsewhere, where separate roles predominate. According to a recent Board Index report from executive search firm Spencer Stuart, approximately 37 percent of S&P 500 companies in 2009 had separated the chair and CEO roles. That’s approaching double the 20 percent figure from a decade earlier.

And that momentum is showing no signs of abating. Many of America’s corporate casualties of the financial crisis – brand-name companies that failed or were bailed out by the taxpayers – had combined chairman/CEOs. This has led to a louder shareholder chorus clamoring for laws or regulations requiring an independent board chairman. In what some view as a bellwether event on the topic, at the 2009 Bank of America annual meeting, then-CEO Ken Lewis was stripped of his chairmanship by shareholders. Since then dozens of U.S. companies have received shareholder proposals calling for an independent chairman

In what might be a telltale sign of things to come, Whole Foods’ CEO John Mackey recently decided to voluntarily surrender his title of chairman, citing the fact that he had been “targeted by corporate governance activists for several years.” By stepping down now, Mackey, who co-founded the company 30 years ago, has effectively sidestepped an inevitable shareholder proposal and avoided another showdown with activists at the next annual meeting. How many other companies may (or should) be pondering a similar move?

Activist shareholders are no longer the only barbarians at the gate on this issue. Along with the SEC, Congress, other federal agencies and the stock exchanges appear to have joined their ranks. New York Senator Chuck Schumer has drafted a “Shareholder Bill of Rights” that would make an independent board chair mandatory for all public companies. Other bills with similar provisions are under consideration in both the House and Senate, and federal agencies in addition to the SEC are considering new regulations in this area. Even the NYSE and NASDAQ are said to be looking at listing rules that may require a separate board chair.

What does all this mean to companies and their boards? For the U.S. majority that still have a combined Chairman/CEO, and even those that have separated the positions but do not have an independent chair, it means the winds of change are blowing hard. Whether or not this is “change we can believe in,” I’m not so sure. To date, there has been no statistical or empirical evidence that splitting the CEO and chair has generated any meaningful contribution to shareholder value, but appearances may be just as important as actual results on this issue.

Like many areas of corporate governance and investor relations, this issue is one where there is likely no one size fits all answer. All companies, however, will need to explain why they have chosen their particular leadership structure in their proxy. So it’s time for boards and management to start addressing this topic. The recently adopted SEC rule is likely just the first step. It will be interesting to see how the next chapter unfolds as the proxy season heats up.

Jim Buckley

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