US companies are separating their top responsibilities at a faster rate than ever before.
In March shareholder activists once again filed a proxy proposal asking Pfizer to split the roles of CEO and chairman of the board. Charles Raeburn, Pfizer’s senior corporate counsel, says a similar proposal garnered 41 percent of the shareholder vote last year, and this spring ‘it’s conceivable that it will attract an even higher vote.’
The notion of having a chairman who does not also fill the role of chief executive is steadily gaining traction in the US. High-profile companies such as Dell, Hewlett-Packard, Fannie Mae, Oracle and Disney have all divided their top roles recently. Some do it because of the individuals involved; others, like Disney, separate the roles at the insistence of their shareholders. The Council of Institutional Investors (CII) strongly endorses the practice, as do many other watchdog and activist groups.
Meanwhile, a study by Russell Reynolds Associates conducted late last year shows that momentum for the trend is steadily growing. In 2005 nearly 30 percent of S&P 500 companies had split the positions, compared to 21 percent in 2001. Among Nasdaq 100 companies, the split is much higher, with 45 percent decoupling the roles in 2005 – a 10 percent increase over the past four years.
It’s not just the activist shareholder community that supports the idea. Nearly 60 percent of directors surveyed favor splitting the roles of CEO and chairman. Board members feel that having a separate CEO and chairman helps address top-ranked risks such as insular thinking, resistance to choosing a successor and insufficient oversight of management practices.
Some of the impetus for this change is being driven by practical considerations. ‘There’s an argument that the roles have gotten so big, especially at large companies, that it makes sense to divide them and have both individuals have less on their plates,’ says Luke Meynell, head of Russell Reynolds’ UK board practice. He adds that the accepted wisdom in the UK, where CEOs rarely share the role of chairman, is that ‘by combining the roles, you lose some of the checks and balances.’
Not everyone thinks the dual role is beyond the scope of one person. Raeburn, who admits to being in the ‘if it ain’t broke, don’t fix it’ camp, feels one person performing Pfizer’s top two roles is working just fine. Though the shareholder proposal currently before Pfizer is non-precatory – even if it attracts a majority of shareholder votes, it is still not legally binding – Raeburn suggests that if it gains majority support, the proposal ‘would cause people to think pretty hard about the issue.’ A number of companies in the UK have decided to ignore resolutions that received a majority of support. In nearly all cases this has had a crippling effect on the board, and in more than one occasion has led to director resignations.
Broc Romanek, who serves as editor of TheCorporateCounsel.net and is a member of the national board of the Society of Corporate Secretaries and Governance Professionals, emphasizes that a company’s circumstances often determine the right path to take when making this potentially thorny decision. Splitting the roles, for instance, makes sense for a company in crisis mode, says Romanek, adding that ‘there you want a powerful chairman who’s independent from the CEO.’
Recruiting issues
Wresting the chairmanship from your CEO will more often than not make for an unpleasant conversation. The types of individuals who become CEOs often believe they are more than capable of holding both roles and managing all that they entail. For this reason, the positions are often separated at a natural juncture for the company – for instance, when the CEO steps down and a successor is sought.
This is precisely what’s happening at Aetna. The announcement that John Rowe, the insurer’s CEO and chairman, is retiring has spurred the board to do some soul-searching. On February 14 Ronald Williams, Aetna’s former president, was named CEO, but no announcement about who would become chairman of the board was made. ‘The retirement of Rowe, which will occur sometime later this year, presented an opportunity for the board to consider the most appropriate governance structure for Aetna in the future,’ spokesman David Carter tells Corporate Secretary.
Many believe the CEO job is far more tempting if the titles of CEO and chairman of the board are packaged together. In fact, 58 percent of board members surveyed by Russell Reynolds feel it’s easier to lure candidates when the CEO and chairman roles are combined.
Andrea Redmond, co-leader of the US CEO/board services practice at Russell Reynolds, points out that separating the roles actually can widen the pool of possible candidates. She notes that a company might be willing to take a chance on a slightly less seasoned CEO if that individual would not also become chairman of the board. Should the individual later wow everyone, he or she could then be offered both titles.
Although it’s impossible to underestimate the power of ego in corporate America, how an executive responds to the idea of having the roles divided depends almost entirely on the individual in question. In a March 17 article in The New York Times, Steven Raymund, chairman and chief executive of Tech Data, announced plans to surrender the chief executive title as soon as the company finds a successor. ‘I want to stay involved with the company,’ Raymund explained. ‘But I’m getting fatigued, and I want to do other things with my life.’
When in Rome
Whether the roles of CEO and chairman should be combined may depend on tradition and general business culture. In the UK and most other European countries, for instance, governance structures have evolved in such a way that these roles are typically separated.
‘Virtually all large UK companies have separate CEO and chairman roles,’ notes Meynell. Throughout Europe more than 70 percent of the largest companies have split the roles – and the trend continues. In 2004 John Ritblat surrendered the chief executive title at British Land, remaining chairman of the board. The arguments for separating the two most senior roles are those of oversight and independence. In some European countries, including Germany, the separation is now legally mandated.
Precedent and the status quo also contribute to the fact that the roles are still usually combined in the US – while decoupling feels far more natural in the UK and continental Europe. ‘If you spent your whole career trying to be Jack Welch, it’s hard when it’s your turn to hear that the company has decided to split the roles,’ observes Meynell. But this argument runs into problems when considering that the move to split the roles in the UK only began to gain traction in the early 1990s. Until that time, up-and-coming British executives were accustomed to idolizing joint chairmen/CEOs.
Carolyn Brancato, director of the governance center at the Conference Board, points out that European companies may follow a different leadership model because they have more concentrated ownership profiles. Occasionally in the UK, and more often in other European jurisdictions, a company has five or six shareholders who own a majority of the stock. In this case, the chairman of the board is frequently someone from that community of major investors. In the US, the shareholder base is traditionally more diversified, making it rare for a large company to have a shareholder with a stake of more than a few percentage points. Brancato explains that US companies, therefore, tend to seek board chairmen from within management’s ranks.
Other cultural differences exist as well. In the UK and continental Europe, an independent, non-executive chairman – an individual who had not previously held a managerial title at the company – is the preferred model, according to the Russell Reynolds survey. However, many US companies want someone with more in-depth knowledge of the business and the sector in which it operates. This would typically be someone who has held a senior leadership position within the organization.
In search of definition
Although it’s not a particularly sexy conclusion to reach, a number of experts believe there’s no right answer for whether a company should split the roles of CEO and chairman of the board. It simply depends on the situation at a particular company.
Many companies have a CEO who also serves as chairman of the board – and the situation has worked well. Scana, an electric and gas utility, is one such company. ‘What we’re doing has worked for us,’ says Scana corporate secretary Lynn Williams. ‘And until it doesn’t work, I don’t think we’ll change it.’
How a company organizes its top titles today does not necessarily indicate anything about what its governance structure will be tomorrow. Brancato points out that General Motors separated its CEO and chairman roles during a transition, and later put the roles back together.
Nell Minow, founder and editor of the Corporate Library, thinks getting hung up on titles is a mistake. ‘It doesn’t matter what you call this person,’ she says. ‘You can call them emperor – as long as you have someone addressing the crucial, dysfunctional nature of the CEO having direct and uncurtailed control over the board agenda and the quality, quantity and timing of the information being given out.’
Regardless of who holds which role, ‘if you can achieve independence of the board, that’s the key issue,’ notes Brancato. ‘You could separate the roles and still have a weak outside chairman who leaves everything to the CEO.’
Lead director = de facto chairman
As a result of last spring’s 41 percent vote in favor of separating the chairman and CEO roles at Pfizer, the company’s board tapped Stanley Eikenberry as lead independent director in September 2005. Although a formal definition of lead director has yet to gain universal acceptance, Eikenberry presides in the chairman’s absence and is leader of all executive sessions – meetings that take place without management present.
Appointing a lead director is a popular alternative to splitting the roles. According to a 2005 survey by the National Association of Corporate Directors (NACD), 39 percent of the 5,000-plus companies studied have lead directors.
Both Minow and NACD president and CEO Roger Raber agree that the lead director can be an important fail-safe against a domineering chief executive. Raber adds that the issue of who sets the board’s agenda is critical. He also says it’s now considered best practice for the lead director to meet with the chairman and for these two individuals to create the agenda together.
Minow urges companies to look at the big picture, emphasizing that the proof of true independence lies in a board’s actions. ‘How do we know if it’s a good board? Because it does good things, not because it says good things,’ she emphasizes. ‘As we all remember, the Enron board looked great on paper.’
