The Conference Board Governance Center Blog

Oct
20
2009

Directors Get It: Shareholders Want Independent Board Chair

Like it or not, the wave of corporate governance reform is coming to the U.S. boardrooms quicker than some might like either in the form of successful shareholder proposals, SEC disclosure regulations or federal legislation. And the one getting the most traction lately is mandating an independent board chair.

Nearly one year after the financial crisis flashpoint (the Lehman Brothers failure), shareholders are seeking their pound of flesh by targeting the top executives of public companies. Other than raising their ire over the executive compensation packages (including bonuses), some are looking to change the company governance guidelines regarding company leadership.

RiskMetrics Group’s 2009 Postseason Report: A New Voice in Governance: Global Policymakers Shape the Road to Reform, which was released Oct. 16, found that investors have become more aggressive in seeking governance changes. During the 2009 proxy season, there were 31 proposals calling for an independent board chair vs. 28 in 2008. Also, the amount of support increased 7 percentage points to 36.3 percent from 29.3 percent. Looking back to 2007, that figure was only 25 percent.

On Oct. 9, Norges Investment Bank (registration required) of Norway successfully persuaded Sara Lee Corp.’s board to split the role of chair and CEO once its current chief executive Brenda Barnes’ tenure ends. The company amended its governance rules immediately ahead of its Oct. 29 annual meeting. You can read the amended Sara Lee governance guidelines here. Norges Bank also submitted similar independent chair proxy proposals to the boards of Harris Corp., Clorox Co., Cardinal Health and Parker Hannifin.

And the resolutions kept coming. On Oct. 14, the Nathan Cummings Foundation and the Benedictine Sisters of Mt. Angel, Oregon, announced they filed a shareholder resolution with Goldman Sachs board “urging the board to review pay disparity at the company and analyze the appropriateness of its spiraling pay packages.” In a statement, both investors said other investors would file resolutions for “say on pay” or separation of chair and CEO positions. This all took place as the investment bank announced its annual bonuses would reach a record level in 2009.

And let’s not forget back in March when a UK pension fund asset manager Railpen Investments sought a similar shareholder proposal from Texas Instruments board before its annual meeting.

When you consider that New York Congressman Charles Schumer’s Shareholder Bill of Rights (which is still in committee) has a provision that calls for an independent chair and the SEC has a proposed rule that would seek company disclosure on CEO duality, you can see what I mean by traction. For the first time in years, shareholder groups are working in tandem with government to change company governance rules.

“Shareholders are actually looking for an independent chair, not just separating the Chair and CEO roles,” Catherine Bromilow, partner in PWC’s Corporate Governance Group, said during an Oct. 1 Corporate Board Member Boardroom Channel Webcast. “If we look back about 10 years ago, roughly 80 percent had the two positions combined. Now that figure is about 61 percent. It’s clear companies are considering this issue more.”

After exchanging e-mails with one director this week, I realized that what TK Kerstetter, president and CEO of Board Member, said during his Webcast resonates with the director community: “It’s not about titles, it’s about leadership.”

“I believe that a regulation requiring separation of the CEO and Chair does not fit every board,” C. Warren Neel, executive director of the University of Tennessee’s Corporate Governance Center (he’s also director with Healthways and Saks Inc.), wrote me. “There are a host of differences, one being if the company is run by its founder that will make splitting the roles very difficult. The alternative of a lead director then is what some companies choose for a reason, and find very effective. The right lead director can accomplish the same outcome as splitting the roles of CEO and Chair.”

What TK and Warren said reflects what The Conference Board Governance Center advocates in its just released Corporate Governance Handbook: Legal Standards and Board Practices (Third Edition). “Boards should adopt a structure providing outside directors with the leadership necessary to act independently and perform effectively their oversight role. This structure could include separating the positions of chairman and CEO, creating a lead independent director, or, in the case of a former employee acting as chairman, appointing a presiding director from among the independent directors.”

The Commission on Public Trust and Private Enterprise (See Corporate Governance Handbook, page 36) in 2003 stated that “where companies have a nonindependent chairman, the lead independent director or the presiding director should have ultimate approval over information flow to the board, meeting agendas and meeting schedules…”

It’s funny how the UK and a good part of Europe are at least a decade ahead of U.S. companies on this issue. Instead of regulations and best practices, they call them Codes.



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