Separation Anxiety and Your Stocks

Chief executive officers possess lots of power, by virtue of that job title alone. However, when they boast the titles of both CEO and chairman, they wield too much power. Thankfully, more shareholders have become aware of this practice's possible consequences, and more companies are rethinking their stances.

Currently, only 40% of all S&P 500 companies have separated the roles of CEO and chairman of the board of directors. But just because allowing a chief executive to perform "Chairman/CEO" double duty has been common practice for years doesn't mean it's a good practice.

Boards of directors are supposed to protect shareholder interests. Allowing a CEO to take the helm of the board damages the board's independence and hinders directors' ability to effectively oversee corporate managers, much less push back against executives when necessary.

Getting away with way too much
Nathaniel Parish Flannery of GMIRatings, a major corporate governance organization, recently discussed some worst-case scenarios when CEOs take on both roles.

We're all very well aware of high-profile scandals at companies like Tyco, Enron, and more recently, News Corp. (Nasdaq: NWS  ) .

Flannery also pointed to two other companies currently facing scandals: the Securities & Exchange Commission has recently launched a probe into Deere (NYSE: DE  ) for possibly running afoul of international bribery laws, and the CEO and 17 other employees of French oil giant Total (NYSE: TOT  ) will stand trial due to allegations of corruption related to an oil-for-food program in Iraq.

All of these companies share a common factor: CEOs who serve or served the dual roles.

Independence is always ideal
Granted, plenty of CEOs who also serve as board chairmen are likely benign and well-aligned with shareholder interests.

Take Amazon.com's (Nasdaq: AMZN  ) Jeff Bezos, who boasts the titles of founder, CEO, chairman, and president. As much as that sounds like a concentration of an awful lot of power, I have a funny feeling that as a founder, he's quite dedicated to seeing the company succeed for the long haul. Bezos also owns almost 20% of Amazon's shares, further aligning his interests with those of other shareholders.

Still, as a general rule, shareholders deserve truly independent boards of directors. Otherwise, even those directors who do take their roles seriously have trouble doing their jobs.

Take the late Jerome York, who showed himself time and again to be a truly independent director in corporate boardrooms, willing to question how management handled its affairs. He criticized Apple's (Nasdaq: AAPL  ) disclosure of Steve Jobs' health issues, for example. York also ended his tenure on GM's (NYSE: GM  ) board years ago with the following statement: "I have not found an environment in the board room that is very receptive to probing much beyond the materials provided by management."

Even if a CEO is a great guy or gal, putting that person in charge of the board as well simply doesn't serve shareholders' best interests. Even if there's nothing particularly tyrannical or nefarious going on, chief executives are likely pretty busy -- or at least should be -- with the extremely demanding regular jobs they do as employees of the company.

Independent boards are shareholder-friendly, and separating the roles of CEO and chairman is an essential part of that independence.

No separation anxiety for shareholders
GMIRatings' Flannery pointed out that support for separating the chairman and CEO roles is actually gaining ground, even if 60% of the S&P 500 hasn't gotten the memo yet. In 2004, a mere 27% of all S&P 500 companies had separated these titles, so we can see definite progress. Furthermore, GMIRatings' data shows that slightly more than half of the 1,743 largest U.S. companies have split the roles.

Furthermore, the Dodd-Frank Act may be nudging companies toward the conclusion that splitting those roles is a good idea. The legislation required that companies explain their rationale for either having an independent chairman or allowing the CEO to tackle both roles. Having to explain a practice to shareholders probably helps push companies to assess that practice more reasonably.

Let's hope the trend to separate these important roles continues. It can lead to more robust, competitive companies -- and would probably reduce shareholder-value-destroying scandals. That's a major win for shareholders on both counts.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of General Motors, Amazon.com, Apple, and Total, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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