Shareholders Should Reject Nabors' Imperial Chairmanship

Nabors Industries (NYSE: NBR  ) claims it is committed to good corporate governance, but its repeated disregard of shareholder demands suggest otherwise. In response to these concerns, the American Federation of State, County, and Municipal Employees' pension plan submitted a shareholder proposal in Nabors' 2013 proxy pushing for an independent chair.

Here's why I think shareholders should support the proposal.

Risks of a combined CEO and chair
A 2012 study conducted by GMI Ratings, corporate governance guru Nell Minow's organization, finds that companies with a combined CEO and board chair are riskier and tend to offer lower long-term returns to shareholders. In addition, the study finds that the combined salaries of employing a separate CEO and chair tend to be lower than paying someone to occupy both roles.

Risks at Nabors
You don't just have to count on the general argument against combining these roles. There's reason to believe that allowing Anthony Petrello to continue to serve as both CEO and board chair is a particularly bad idea at Nabors. Let's take a look at some of the ways shareholders have been poorly represented under the current leadership structure.

Some "highlights" include:

  • A failure to revise its bylaws to give shareholders the right to list alternative nominees for election to the board of directors, despite the fact that a shareholder proposal pushing for this change received a majority of votes in 2012. A similar proposal also passedat Chesapeake (NYSE: CHK  ) last year, but unlike Nabors, Chesapeake chose to respond to shareholder demands by sponsoringits own proxy access proposal in this year's proxy.
  • A failure to amend its bylaws to require shareholder approval of future severance payments, despite the fact that a shareholder proposal pushing for this change received a majorityof votes in 2012.
  • The creation of executive compensation plans that failed to receive majority support from shareholders in 2011 or 2012, and that offered perks so questionable that it attracted the attention of the SEC.
  • The adoptionof a "poison pill" plan in 2012 without shareholder approval.
  • Nabors' share price is lower than it was five years ago.

The Foolish takeaway
In Nabors' case, I believe an independent chair would help promote more accountability to shareholders and help prevent missteps like those listed above. Even when a company employs an independent lead director, allowing the CEO to also serve as board chair can still interfere with an honest assessment of the CEO's performance and the creation of appropriate compensation packages because of the influence that the combined CEO and chair continues to exercise over the rest of the board.

If the proposal passes, and Nabors takes on an independent chair, I'll be much more optimistic about its future. Until then, I think investors should remain wary. We'll know the preliminary outcome at the annual shareholder meeting on June 4.

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