Chairman and CEO: two distinct jobs whose combination is rarely questioned. Yet, inherent conflicts of interest make the consolidation of these two historically separate positions a potentially dangerous situation.
In his latest book, Origins of the Crash, acclaimed financial author Roger Lowenstein details the cultural shifts that both precipitated and resulted from the greatest bull market in history. We've all heard stories of the unethical and fraudulent behavior that occurred in the 1990s, and Lowenstein lays much of the blame at the feet of dominant CEOs, whose power often derived from the practice of combining the CEO and chairman positions.
Lowenstein sums it up nicely: "... Think how inappropriate would the description President and Chief Justice sound, or Head Coach and Quarterback. The board's job, like that of the coach, is to monitor those on the field." Unfortunately, with the head coach also being the star player, monitoring took a backseat, essentially putting a lid on questioning management.
Not surprisingly, some of history's biggest scandals occurred under the watchful eye of a combined chairman and CEO. Enron's Kenneth Lay held both positions when his company went bankrupt after years of fraud and deception. Another 90s market darling, Tyco (NYSE:TYC), saw its former chairman and CEO, Dennis Kozlowski, loot the company for personal gain. While both men have so far managed to escape punishment, they exemplify the problems with combining these conflicting positions. These men were expected to act as watchdogs over themselves, an idea that could only be acceptable in the strange world of corporate boardrooms.
Thankfully, there's evidence that corporations are beginning to understand the problem. In early March, Michael Dell stepped aside as CEO of Dell (NASDAQ:DELL), handing the reins to President Kevin Rollins while maintaining the chairmanship. At the same time, CEO Michael Eisner was stripped of Disney's (NYSE:DIS) chairmanship, a result of serious board infighting and investor unrest. And just last week, Tom Siebel resigned as CEO of Siebel Systems (NASDAQ:SEBL), a position he held jointly with the chairmanship for over a decade, paving the way for IBM's (NYSE:IBM) Mike Lawrie to take over.
The need for independent directors, especially chairmen, is a key lesson from the roaring '90s. Whether it's forgotten again will depend largely on the length of investors' memories, and whether they continue to demand board independence.
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Fool contributor Chris Mallon recommends anything written by Roger Lowenstein, and doesn't own shares in any companies listed in this article.
