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 [email protected]. 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.
