p>Public company corporate governance practices have been the center of attention in the corporate sphere for nearly a decade, however one practice that has only garnered serious attention as of late, is having one individual serve as both the company’s chief executive officer and chair of the board of directors. Although the majority of shareholders still appear to feel comfortable with this approach to governance, there is a growing sentiment among many 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), there has been a growing movement towards separation of such roles in an effort to increase transparency and shareholder confidence. Furthermore, according to statistics compiled by GMI Ratings, a corporate governance research and rating firm, five-year shareholder returns are nearly 28 percent higher at companies with a separate CEO and Chair. 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 33 percent of votes cast at shareholder meetings, compared with 28 percent in 2010.
Nevertheless, the numbers speak for themselves - despite the increase in shareholder sentiment to split the role of CEO and chair, the majority of shareholders still feel most comfortable with Imperial CEO’s protecting their investments. So why, with all that has been done to reform and regulate the public company corporate sphere, has this trend not gained more momentum?
The fact of the matter is there are some advantages to having an Imperial CEO. 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 among an organization's corporate board members. Executive directors and 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.
However, 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. If the public company has been succeeding under an Imperial CEO, why rock the boat? There is also a bit of arrogance at play in these companies. The shareholders feel that the scandals which have occurred at other public companies where one individual held the role of chair and CEO will not happen at their company because those incidents are “outliers” and that their company is on the right track in terms of corporate governance.
My advice to public company shareholders – split the role of chair and CEO. The risks of holding both titles in one person far outweigh the benefits. Furthermore, if the U.S. Securities and Exchange Commission doesn’t mandate it first, I expect that within 5 years, the standard in corporate governance best practices will dictate splitting the role of chair and CEO. So get ahead of the curve now and take the steps necessary to protect your investments.