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October 22, 2012

Public company corporate governance practices have garnered significant attention over the past decade. However, only as of late has serious attention been directed to the practice of having one individual serve as both a company’s chief executive officer and chair of the board of directors. Although the majority of shareholders still appear to feel comfortable with this, there is a growing sentiment that the roles of CEO and chair of the board should be split.

“Imperial CEO’s,” those that serve as both CEO and chair, wield significant power over the affairs and overall strategy of a company.  But with the proliferation of scandals at public companies with Imperial CEO’s (e.g. Chesapeake Energy, Best  Buy, Bank of America), there has been a growing movement towards separation of such roles in an effort to increase transparency and shareholder confidence.  According to statistics compiled by GMI Ratings, five-year shareholder returns are nearly 28 percent higher at companies with a separate CEO and Chair.

Nevertheless, the numbers speak for themselves.In a survey done by ISS Proxy Advisory Services last year, support for proposals to split the chair and CEO roles garnered an average of only 33 percent of votes cast at shareholder meetings. It is clear thatthe majority of shareholders still feel most comfortable with Imperial CEO’s protecting their investments because of the inherent advantages with such a position.  With the implementation of more independent directors on boards, and such members being put in charge of multiple board committees, there is a need for executive leadership on the board. Imperial CEO’s have the best access to information as it’s happening within their company. Furthermore, a good Imperial CEO can act quickly and decisively to quell or take advantage of a situation, a move necessary to successful business.

I believe that the real reason shareholders have been slow to embrace splitting the role of chair and CEO is because like most people, they fear change. However, change may be coming.  The risks of holding both titles in one person far outweigh the benefits.  By splitting the role of Chair and CEO between two individuals a company is creating a check and balance system that ultimately should serve to protect the interests of the shareholders.  Furthermore, if the U.S. Securities and Exchange Commission doesn’t mandate it first, I expect that within the next 5 years, the standard in corporate governance best practices will dictate splitting the role of chair and CEO. 

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