Save the Chair for the Chief? There's Concern but No Consensus About CEOs Leading Boards

02/07/03
By: Ben White, Washington Post

When the Conference Board, an influential business advisory group, unveiled its corporate governance recommendations last month, the centerpiece was a suggestion that companies “strongly consider” splitting the jobs of chief executive and chairman of the board. Seven days later, one of the nation’s largest and most troubled companies, media giant AOL Time Warner Inc., did exactly the opposite, handing the board chairmanship over to chief executive Richard D. Parsons.

AOL Time Warner is hardly alone in its approach. Another deeply troubled firm, conglomerate Tyco International Ltd., last year gave both titles to Edward D. Breen Jr. In December, General Motors’ directors elected chief executive G. Richard Wagoner Jr. chairman of the board. Last October, International Business Machines Corp.’s board selected chief executive Samuel J. Palmisano as chairman. And overall, an overwhelming majority of U.S. firms continue to combine the jobs.

According to the Corporate Library, 392 companies in the S&P 500 have CEOs who also serve as board chairman. Only 15 firms have a chairman who is an outside, independent director. The rest have chairmen who are executives or former executives or are tied to the company in another way.

So are domestic companies simply thumbing their noses at the argument, made by many reform advocates, that splitting the positions and selecting a non-executive as chairman will help improve corporate oversight, end the era of the imperial CEO and prevent future Enron-WorldCom-style meltdowns?

Not entirely. Online broker E-Trade, criticized for former chief executive and chairman Christos M. Cotsakos’s compensation package, recently split the two jobs after Cotsakos resigned in the face of shareholder anger. Rival Schwab followed suit, to an extent, when chairman and founder Charles R. Schwab announced he would give up his title as co-chief executive. Insurance company Chubb Corp. last month elected a non-executive chairman for the first time ever. Midas Inc. and Pathmark Stores Inc. have also named non-executive chairmen in recent months.

The lack of any clear trend on the issue in part reflects the absence of persuasive data suggesting any one approach brings better results for shareholders. Even corporate governance advocates hedge their bets. Charles Elson, director of the Center for Corporate Governance at the University of Delaware, for instance, noted that British firms generally split the jobs and have not demonstrated stronger performance because of it.

In its January report, the Conference Board offered three approaches and explicitly acknowledged that “no single board structure has yet been demonstrated to be superior in providing the oversight that leads to corporate success.” In addition to suggesting having a non-executive chairman, the board’s report envisioned a potentially proper arrangement in which the chief executive and chairman jobs would be held by different people but the chairman would be a corporate insider. It also outlined a scenario in which the jobs could continue to be held by the same person without compromising diligent oversight.

But the report also cautioned that those two approaches required special measures to ensure that directors receive critical information on a company’s finances and do not become know-nothing rubber stamps for an all-powerful chief executive.

“The commissioners decided that in the scandals of the last two years, WorldCom, Enron and the rest, the board was really not functioning in its proper oversight role,” said Carolyn Brancato, director of the Global Corporate Governance Research Center at the Conference Board. “That’s why we proposed that firms follow one of these three approaches, and if they don’t, disclose why they think their board structure is appropriate.”

In the case of a firm choosing an insider, but not the CEO, as chairman, the Conference Board recommended that the company select a “lead independent director” who would work closely with the chairman to coordinate information flow to the board, schedule board meetings and set the agenda for the board. In the case of a company that continues to combine the jobs, the Conference Board said the form should appoint a “presiding director” who would run meetings of the independent directors and have final say on information flow, board meetings of the independent directors and have final say on information flow, board meeting schedules and board agendas.

Nell Minow, among the nation’s leading advocates for stronger corporate governance procedures, said the Conference Board’s nuanced approach was appropriate in that it recognized that board structure depends in large measure on a firm’s unique circumstance. She said that other factors, such as the number of independent directors and powers of a lead independent director, can offset problems posed by combining the jobs.

“It’s not one-size-fits-all. It’s facts and circumstances,” Minow said. “The problem you have in the American system is if both jobs are held by the same person, then the CEO controls the agenda and the quality and quantity of information that flows to the board. How do you get around that? One way is to split the two jobs. But it is not the only way.” Minow added that it “doesn’t count if you do what Enron and Global Crossing did and split the positions but have the previous CEO or the company founder take the chairmanship.”

Minow and others pointed to General Motors Corp. as a firm that has combined the positions but retains a board structure strong enough to override fears of an imperial CEO. In explaining the arrangement, GM spokeswoman Toni Simonetti noted that GM was among the first U.S. firms to split the positions but that the company’s current circumstance favored combining the slots.

“Our board believes this is the best leadership mechanism for us at this point in time,” she said. “Splitting the positions is just a mechanism to provide oversight of the management team and I believe, and the board believes, that GM does provide that oversight. Our board is made up of mostly independent directors and we have audit, directors affairs and corporate governance committees that are made entirely of independent directors.”

Even Tyco, a company prosecutors say was looted by powerful former chairman and CEO L. Dennis Kozlowski, gets a pass from reformers on its decision to give both jobs to Breen. Tyco’s situation is unique, reform advocates said, because the entire board resigned in the wake of the Kozlowski downfall, leaving the firm in such turmoil that power needed to be concentrated, for a time, in one person. “So much was happening at the time Breen was hired,” Tyco spokesman Gary Holmes said, “that the board felt that having the two positions combined would allow the company to move faster and more efficiently.”

Dan Moynihan of executive pay consulting firm Compensation Resources said chief executives clearly prefer holding both positions because it gives them more power over a company’s direction, although many realize it is harder in this environment to demand both roles.

Governance advocates say boards should resist demands for so much power. “If a prospective executive does that,” Minow said, “he or she is not the right person for the job.”

While GM and Tyco mainly escape criticism for their board structure, AOL Time Warner does not. Several governance specialists said it was especially important for firms in financial trouble and facing a cloudy future, such as AOL, to separate the positions or at least have a presiding director with the power to set board meeting agendas and control information flow to the board.

AOL has neither a presiding nor a lead independent director. But company spokeswoman Tricia Primrose said the firm has an “activist” board made up of a majority of independent director. She also said regular executive sessions are held without inside directors present. The sessions are led by whichever chairman heads the committee with jurisdiction over the matter being discussed.

Primrose said the board took corporate governance issues into strong consideration before deciding to give both titles to Parsons. “The board considered all possible models and determined that combining the role of chairman and CEO made sense for us.”

Some executives question privately whether corporate governance is really a key issue for investors. Menlo Park, Calif.-based E-Trade, with its recent decision to split the two jobs, clearly decided it is.

In an interview, new E-Trade chief executive Mitchell H. Caplan acknowledged that governance matters at the firm had become “a significant issue for investors and analysts” and said the company had to send a strong signal that it was committed to better oversight.

“This was a great opportunity for us, looking forward and looking at the trend pretty clearly favoring separating the chairman and CEO positions to go a step further and identify our chairman as a non-executive and demonstrate our commitment” to stronger governance.

Analysts caution, however, that changes could be skin deep. Rachel Barnard, an analyst at Chicago-based Morningstar Inc., said E-Trade had almost no choice but to split the positions, given the outcry over Cotsakos’s compensation package, which in 2001 made him the highest-paid executive in the brokerage industry. But she was skeptical that the company’s operations would change much as a result of the split. She cautioned investors that at many companies the changes may turn out to be “largely cosmetic.”