Tipping Point for Combined Chairman and CEO?
The combined role of chairman and chief executive officer, a corporate governance structure favored by many Fortune 500 firms, may soon go the way of the pension plan.
Indeed, the financial crisis of 2008, which left many of Wall Street's biggest institutions in the trash heap of history, has prompted a growing contingent of shareholder activists, regulators and financial services firms to demand greater accountability of leadership at publicly held companies.
And many, including the Chairmen's Forum, a group of 50 corporate leaders, investors and governance experts, have set their sights on companies that designate a single person board chair and CEO.
The group, whose members include Harry Pearce, non-executive chairman of Nortel Networks and former American Express head Harvey Golub, was convened by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.
It is calling on public companies in the U.S. and Canada to separate the roles of chairman and CEO, and hire an independent chairman to help restore the power balance in boardrooms.
Financial services firm Spinnaker Trust in Portland, Maine, is also leading the charge for change. The firm unsuccessfully filed a proposal last year on behalf of shareholders to separate the CEO and chairman role at oil giant ExxonMobil .
"Shareholders have the right to the best possible representation on the board, and we believe it should be balanced and independent," said Spinnaker Trust senior investment adviser John Higgins, noting the company will likely file the same proposal at next year's annual shareholder meeting. "If the CEO is also setting the agenda for the board, there is an inherent conflict because the board is supposed to supervise the CEO."
The percentage of U.S. firms that split the CEO and chairman position is rapidly growing, but lags behind Europe, where such division is widely considered best practice.
Some 43 percent of S&P 500 companies in 2012 separate the job of chairman and CEO, up from 25 percent in 2002, according to executive search firm Spencer Stuart.
By comparison, 79 percent of the largest British businesses name an outside chairman on their annual reports, according to the Millstein Center.
Publicly held corporations in the U.S. are required to have a board of directors to oversee top management and ensure the mandate from the corner office reflects shareholder interest.
When the board chair and the CEO are one and the same, the CEO is effectively overseeing him or herself — a potential conflict of interest, said Stephen Davis, senior fellow at Harvard Law School's Program on Corporate Governance.
"If you have a combined chair and CEO, there's an argument that the CEO has no boss, and shareholders are more inclined now than ever before to want accountability from top executives," he said. "It's hard to have a fully independent board that is able to hire and fire the CEO when the CEO is also the chair. Not impossible, just hard."
The same concern exists with respect to executive pay, since the board of directors must vote to approve an increase in executive compensation. If the chairman is also the CEO, that person is voting on his or her own raise.
Shareholder activists also note that it costs more to combine the roles, a premise supported by a 2012 report by research management firm GMIRatings.
The study, which focused on 180 North American firms with market capitalization of $20 billion or more, found the cost of employing a combined CEO and chair is 50 percent higher than the cost of employing a separate CEO and chairman.
Executives with a combined CEO and chair position earn a median total compensation of just over $16 million, while a separate CEO and chairman earn a combined $11 million.
The study also found that five-year shareholder returns are nearly 28 percent higher at companies with a separate CEO and chair.
In efforts to improve transparency, the Securities and Exchange Commission in 2010 issued rules that require companies to disclose details about their leadership structure, including whether it combines or separates the chairman and CEO position, and its reason for doing so.
The Dodd-Frank Act, enacted to protect consumers in the wake of the Great Recession in 2008, includes a similar provision.
Activists who champion checks and balances in the boardroom have had some success.
Most recently, Blackberry maker Research in Motion buckled to pressure by shareholders including Canadian-based mutual fund company Northwest & Ethical Investments to separate the roles of co-chairman and co-CEO — which were shared by two men for more than 20 years.
The company, which separated the positions and retained an independent chairman in January, lost significant market share and suffered a stock price slide under the old regime.
Depending on the industry, however, a valid case can also be made for keeping the positions combined, said Don Keller of PricewaterhouseCoopers Center for Corporate Governance. Keller said individual companies are best positioned to determine the leadership structure that serves their business and shareholders best.