Effective corporate governance continues to be at the top of the agenda for many today.
In our discussions with activist shareholders, regulators, institutional investors, etc., there is a continuing concern that the shareholders’ best interest is not always well served by the boards of directors that charged with representing them. Some argue that this is partially due to the hangover of pre Sarbanes history. Others suggest that this is due to the complexity of factors that relate to the expectations of representing oftentimes competing corporate stakeholders interests in a world that is changing at a pace that leaves board members uncertain about how best to govern.
Actually, it is a combination of both factors and many more.
Gary Wilson, in a recent Wall Street Journal Opinion article discusses, “How to Rein in the Imperial CEO” whom he defines as a CEO who is also Chairperson. Wilson advocates, with which we agree, that separating these roles is positive step toward increasing the influence of ownership. Interestingly, today, 65% of S&P 500 companies are led by one executive holding both positions and that some major companies like Coca Cola, UPS, Deere, et al require that their CEO be their company’s chairperson.
Given our experience and as Wilson points out, American CEOs are paid a multiple of their counterparts in Europe (where these roles are distinctly separate) while not delivering multiples of value that justify this disparity. We ask, then, are our shareholders receiving the appropriate return for this leadership investment?
This leads to the question of who is in charge of evaluating value creation. This separation, with clear delineation of the Chairperson and CEO roles and responsibilities, creates a necessary tension of checks and balance, if you will, that is too often missing in the board room of America’s public companies. We often hear of board members who feel “at risk” by questioning, debating, or contributing at board meetings if their opinion varies with that of a powerful Chairperson who is also CEO. When this happens, clearly, the balance swings to the insiders whose agenda is oftentimes not exactly the same as that of the shareholders.
Some suggest that the answer lies in halfway measures such as appointing a “Lead Director.” Our experience is that a “Lead” or “Presiding Director” provide a buffer between the “Imperial CEO” and their board but rarely provides the necessary détente that is one of the true watchwords of good governance…independence.
In the end, it’s the capital of the shareholders that is at risk and it deserves to be governed with transparency, inclusion, and with fiscal responsibility. Within this context, separating the roles of the CEO and Chairperson, in our view, is a step that many companies should evaluate.