Cisco in Reverse

Man, I hate writing this story. An old friend of mine works at Cisco (Nasdaq: CSCO  ) , which stinks, because I'm about to stick it to the company. Oh well.

It's not as if Cisco doesn't have it coming. Yesterday, it announced that the board has named CEO John Chambers to replace John Morgridge as chairman, effective as of the company's annual shareholder meeting in November.

Here's what that means: Chambers is now, in effect, his own boss. He represents both management and shareholders. Checks and balances? What are those?

For its part, Cisco proclaims to have excellent governance. There's some truth to this. For example, its board includes nine independent directors, including Autodesk (Nasdaq: ADSK  ) executive chair Carol Bartz and Wells Fargo (NYSE: WFC  ) chairman and CEO Richard Kovacevich. Furthermore, Institutional Shareholder Services assigns Cisco a Corporate Governance Quotient better than 86.4% of the S&P 500's technology and hardware firms.

Still, management and the board should know better. Abuse of power occurs only when power is consolidated. And a bad system produces bad results as easily as a bad guy does. Fortunately, Chambers strikes me as a remarkably good guy. But that doesn't mitigate my uneasiness.

I'm most annoyed that there's no good reason for the change, other than expediency. Sure, it probably would have taken some time to find a qualified independent director. But new research says the wait may have been worth it. A study by consultant Booz Allen Hamilton shows that stocks of firms with an independent chairperson beat the market by an average of 7%. That's versus just 2% for peers that combine the CEO and chairperson role. (Booz Allen studied CEOs who left their posts in 2003, 2004, and 2005.)

There's a reason for this, Cisco. Investors -- especially those of the Foolish variety -- recognize that while good governance has a price, the cost pales next to the scars of scandal. Please listen to them before it's too late.

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Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out which stocks he owns by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.


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