Let's Fix Director Independence

This article is part of an ongoing series about the Shareholder Bill of Rights currently in Congress. Together, we can ensure that this bill truly represents our interests as shareholders and individual investors.  

In early 2008, if you took a look at the boards of Lehman Brothers, Citigroup (NYSE: C  ) , Countrywide Financial, Merrill Lynch, and Bank of America (NYSE: BAC  ) , you would have seen that the chief executive officers of those companies were also chairing their companies' boards.

Of course, wearing both the CEO and chairman hats was not unusual then, nor is it now. But common practice doesn't make something common sense. Given that the job of boards is to oversee executives and represent shareholders, wouldn't it be nice to have at least the possibility of some pushback against management -- something that's more likely to come from an independent chairman heading up the board?

That's the thinking behind one part of the Shareholder Bill of Rights Act. It seeks to address the argument that weak corporate governance policies contribute to some of our biggest corporate debacles:

The chairperson of the board of directors of the issuer (A) shall be independent, as determined in accordance with the rules of the exchange on which the securities of such issuer are listed, and otherwise by rule of the Commission; and (B) shall not have previously served as an executive officer of the issuer.

That's the Shareholder Bill of Rights' fancy way of saying that the CEO and chairman of the board of directors shall no longer be one and the same guy (or gal), nor should a former CEO function as the chairman.

The current situation
Corporate management teams and corporate boards aren't supposed to get too cozy. Boards of directors are supposed to act on behalf of shareholders to make sure management is running the business properly. It kind of stands to reason that if the chief executive officer of a company is also the chairman of the board, there might be a bit of a management-friendly dictatorship going on. It's a little like letting the fox guard the henhouse.

Separating the chairman and CEO roles at companies is a major initiative that many corporate-governance-minded activist shareholders pursue. For example, The Wall Street Journal recently pointed out that corporate-governance expert Robert A.G. Monks is on his seventh try to separate the CEO and chairman roles at ExxonMobil (NYSE: XOM  ) .

One heartening trend right now, though, is that the number of companies splitting the chairman and CEO roles is increasing, albeit slowly. Governance firm The Corporate Library recently reported that about 37% of companies in the S&P 500 have adopted this policy, up from 22% in 2002. Still, that's not the majority by any stretch. And while some companies, such as Disney (NYSE: DIS  ) and H&R Block (NYSE: HRB  ) , have indeed split the chairman and CEO positions, other companies, such as CVS (NYSE: CVS  ) , have simply declined to comply with non-binding shareholder votes demanding that the two roles be split.

The pros and cons
The pros of splitting the roles are easy to list. To put it simply, there's an inherent conflict of interest in the influence a CEO may have over a board of directors, and it's difficult to resist the urge of a "good buddy" mentality. Proponents say board members can speak more honestly if management's head honcho isn't running the meeting.

Even more simply, if a CEO is just the CEO, then he or she may focus entirely on doing his or her core job, which is, of course, running the business. That's why they get paid the big bucks in the first place.

Critics of splitting the roles contend that it can result in power struggles between these two top dogs, or cause confusion in the ranks if the independent chairman tries to wield too much power. There is also a solid argument that a CEO has the in-depth information and knowledge the board needs, so he or she is the best-qualified person to be running the board as well.

How reform will affect you
For all that overzealous regulation can screw up companies despite the best intentions, good corporate-governance requirements such as splitting the chairman and CEO roles should address some of the major problems shareholders face. After all, corporate boards are supposed to advocate on behalf of shareholders, not function as yes-men to management, and it stands to reason that this goal is hampered when management has such a large position of power on the board.

We've all seen too many examples in which it felt as though management had too much power, boards were weak and incompetent, and shareholders got the rotten end of the deal.

Vanguard titan John Bogle pointed out in a conversation here at the Fool that CEOs are not Caesar; they are not gods; they are employees, and they have a job to do for shareholders. "Superstar CEO" worship puts all shareholders at risk of becoming apathetic in the way we vote on our proxies and how we invest in our portfolios.

Shareholders, be heard!
Will splitting the chairman and CEO roles at companies help make the relationship between boards of directors and corporate management teams more effective, and therefore improve your long-term returns (or avoid ugly corporate blow-ups)? Or do you think this could have negative ramifications for our companies? What do you foresee from such a policy executed across the board (no pun intended) in corporate America?

Here at the Fool, we are a diverse bunch of investors with myriad opinions -- and we're also diehard champions of discussion. We want the Shareholder Bill of Rights to come from all of us. So what do you think? Post your comments at the bottom of this article (or any other in this series). Cast your vote in our online polls. Or send us an email at ShareholderRights@fool.com. Let's all tell Wall Street and Washington what rights we shareholders really need.

Once you’re done, remember to check out “It's Time for a Shareholder Revolution” for more on the Shareholder Bill of Rights.

Alyce Lomax owns no shares of any of the companies mentioned. Disney is a Stock Advisor and Inside Value pick. The Fool is investors writing for investors.


Read/Post Comments (3) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 02, 2009, at 5:44 PM, andpatt wrote:

    They should be split ,but an ex ceo can be ok.

  • Report this Comment On October 02, 2009, at 8:32 PM, Sail285 wrote:

    I think the two positions should be separate. As to the CEO having the information that the board needs to make good decisions, he should be required (by the board) to report at each meeting. Failure to provide critical information to the board should be reason to replace the CEO.

  • Report this Comment On October 12, 2009, at 10:14 PM, Bonobo100 wrote:

    Why are shareholders' votes not binding? What kind of "rights" are these? I am for making our votes binding.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 998998, ~/Articles/ArticleHandler.aspx, 9/2/2014 1:21:14 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement