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Separating Conjoined CEO-Chair is Smart Governance by Tim Smith From the December 2009 issue of ValuesFor years Walden has actively pressed for governance reforms to help protect investors and the public interest. Through initiatives supporting executive compensation accountability, increased board independence, and annual elections and majority votes for directors, Walden has balanced advocacy for social and environmental responsibility with active engagement encouraging good corporate governance. Many investors are involved in dialogues with companies to encourage best practices in corporate governance. We are encouraged to see increasing responsiveness from business and a willingness to study governance reforms that enhance accountability and help build long-term shareowner value. This year Walden has a new governance focus: promoting separation of the roles of board chairperson (Chair) and chief executive officer (CEO). We are holding conversations with a number of companies and sponsoring shareholder resolutions to promote this reform. In the spring of 2009, the Millstein Center for Corporate Governance and Performance at Yale School of Management, working with a group of directors through its Chairmen’s Forum, prepared an important paper that makes the case for having a chairperson who is not an executive officer. The paper, Chairing the Board – The Case for Independent Leadership in Corporate North America (http://millstein.som.yale.edu/), cites many benefits:
The Chairmen’s Forum at Yale also observes that global experience demonstrates the model to be a successful board structure. Instead of a dramatic shift in governance that would remove a current CEO from the chairperson’s role, the Forum suggests phasing in the policy during the next CEO transition. Walden concurs with this approach and believes the Millstein-Chairmen’s Forum paper deserves careful study by board governance committees. Separation of the Chair and CEO roles is increasingly a reform that investors encourage. Fortunately, this board structure is also a growing trend within the business community. According to a June 12, 2009, Business Week article by Joseph McCafferty: “In 1998, 16 percent of the S&P 500 had a non-executive chairman (meaning someone who was not also the CEO). By 2008, that number had grown to 39 percent.” McCafferty further points out that this governance structure is more common in Europe, remarking that in the United Kingdom 79 percent of large companies have independent Chairs. We should note, however, that the 39 percent figure reported in Business Week includes both independent outside Chairs and insiders, such as a former CEO serving as Chair. In early September 2009, Walden sent letters to 34 large companies held in client portfolios that have combined the positions of Chair and CEO, making the case for separate roles and requesting an explanation for their governance structure. We are pleased that within two months 80 percent have responded, often with thoughtful explanations of their decision-making processes and their rationale for maintaining a combined CEO-Chair position. The primary argument these companies put forth is their belief that the presence of a lead director who plays an important independent role for the board alleviates concerns about a CEO who also functions as Chair. While there is respectful openness to study materials and discuss the issue with governance experts, there is no interest thus far in shifting from the present model. Significant movement on this matter is likely to be an uphill climb. Investors are sponsoring resolutions with several dozen companies this year pressing for this reform, including a filing by Walden with State Street. In 2008 the average vote for this resolution was approximately 37 percent, indicating strong shareowner support for strengthening board independence by separating the Chair and CEO.
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